City and County of San Francisco Basic Financial Statements and Single Audit Reports for the Year Ended June 30, 2016

BASIC FINANCIAL STATEMENTS AND SINGLE AUDIT REPORTS

FOR THE YEAR ENDED JUNE 30, 2016

CITY AND COUNTY OF SAN FRANCISCO BASIC FINANCIAL STATEMENTS AND SINGLE AUDIT REPORTS FOR THE YEAR ENDED JUNE 30, 2016

Table of Contents

FINANCIAL SECTION

Independent Auditor’s Report ...... 1 Management’s Discussion and Analysis (Required Supplementary Information) ...... 3 Basic Financial Statements: Government-wide Financial Statements: Statement of Net Position ...... 23 Statement of Activities ...... 25 Fund Financial Statements: Balance Sheet - Governmental Funds ...... 26 Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Position ...... 27 Statement of Revenues, Expenditures, and Changes in Fund Balances – Governmental Funds ...... 28 Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities ...... 29 Budgetary Comparison Statement - General Fund ...... 30 Statement of Net Position - Proprietary Funds ...... 33 Statement of Revenues, Expenses, and Changes in Fund Net Position – Proprietary Funds ...... 35 Statement of Cash Flows - Proprietary Funds ...... 36 Statement of Fiduciary Net Position - Fiduciary Funds ...... 38 Statement of Changes in Fiduciary Net Position - Fiduciary Funds ...... 39 Notes to Basic Financial Statements ...... 40 Required Supplementary Information: Pension Plans: Schedule of the City’s Proportionate Share of the Net Pension Liability ...... 161 Schedule of Changes in the Net Pension Liability and Related Ratios ...... 162 Schedule of the Employer Contributions ...... 163 Other Postemployment Healthcare Benefits: Schedules of Funding Progress and Employer Contributions ...... 165 SINGLE AUDIT SECTION Schedule of Expenditures of Federal Awards ...... 167 Notes to the Schedule of Expenditures of Federal Awards ...... 174 Independent Auditor’s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards ...... 179 Independent Auditor’s Report on Compliance for Each Major Federal Program and Report on Internal Control Over Compliance Required by the Uniform Guidance...... 181 Schedule of Findings and Questioned Costs ...... 184 Status of Prior Year’s Findings and Questioned Costs ...... 191

Century City

Los Angeles

Newport Beach

Oakland

Independent Auditor’s Report Sacramento

The Honorable Mayor Edwin Lee San Diego The Honorable Members of the Board of Supervisors San Francisco City and County of San Francisco, California Walnut Creek

Report on the Financial Statements Woodland Hills We have audited the accompanying financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate discretely presented component unit and remaining fund information, of the City and County of San Francisco (City), as of and for the year ended June 30, 2016, and the related notes to the financial statements, which collectively comprise the City’s basic financial statements as listed in the table of contents.

Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We did not audit the financial statements of the San Francisco County Transportation Authority, San Francisco International Airport (major fund), San Francisco Water Enterprise (major fund), Hetch Hetchy Water and Power (major fund), San Francisco Municipal Transportation Agency (major fund), San Francisco Wastewater Enterprise (major fund), and the Health Service System, which collectively represent the following percentages of the assets, net position/fund balances, and revenues/additions of the following opinion units. Net Position/ Revenues/ Opinion Unit Assets Fund Balances Additions Governmental activities 1.0% 3.1% 3.5% Business-type activities 89.9% 91.4% 73.0% Aggregate discretely presented component 0.8% 0.5% 14.6% unit and remaining fund information

Those financial statements were audited by other auditors whose reports have been furnished to us, and our opinions, insofar as they relate to the amounts included for those entities, are based solely on the reports of the other auditors. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions.

Opinions In our opinion, based on our audit and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information and the discretely presented component unit, of the City as of June 30, 2016, and the respective changes in financial position and, where applicable, cash flows thereof and the respective budgetary comparison for the General Fund for the year then ended in accordance with accounting principles generally accepted in the United States of America. Macias Gini & O’Connell LLP 315 Montgomery Street, Suite 806 www.mgocpa.com San Francisco CA 94104 1 Emphasis of Matters As discussed in Note 2(s) to the basic financial statements, effective July 1, 2015, the City adopted the provisions of Governmental Accounting Standards Board (GASB) Statement No. 72, Fair Value Measurement and Application, and GASB Statement No. 82, Pension Issues—an amendment of GASB Statements No. 67, No. 68, and No. 73. Our opinion is not modified with respect to these matters. Other Matters Prior-Year Comparative Information The financial statements include partial and summarized prior-year comparative information. Such information does not include all of the information required or sufficient detail to constitute a presentation in conformity with accounting principles generally accepted in the United States of America. Accordingly, such information should be read in conjunction with the government’s financial statements for the year ended June 30, 2015, from which such partial and summarized information was derived.

We have previously audited the City’s 2015 financial statements, and we expressed, based on our audit and the reports of other auditors, unmodified audit opinions on the respective financial statements of the governmental activities, the business- type activities, the discretely presented component unit, each major fund, and the aggregate remaining fund information in our report dated November 23, 2015. In our opinion, the summarized comparative information presented herein as of and for the year ended June 30, 2015, is consistent, in all material respects, with the audited financial statements from which it has been derived. Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management’s discussion and analysis, the schedule of the City’s proportionate share of the net pension liability, the schedule of changes in the net pension liability and related ratios, the schedule of employer contributions – pension plans, and the schedules of funding progress and employer contributions – other postemployment healthcare benefits, as listed in the table of contents be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the GASB who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We and other auditors have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City’s basic financial statements. The schedule of expenditures of federal awards is presented for purposes of additional analysis as required by Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards and is not a required part of the basic financial statements. The schedule of expenditures of federal awards is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the schedule of expenditures of federal awards is fairly stated in all material respects in relation to the basic financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated November 18, 2016 on our consideration of the City’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City’s internal control over financial reporting and compliance.

San Francisco, California November 18, 2016, except for our report on the schedule of expenditures of federal awards, as to which the date is January 20, 2017

2 CITY AND COUNTY OF SAN FRANCISCO Management’s Discussion and Analysis (Unaudited) Year Ended June 30, 2016

This section of the City and County of San Francisco’s (the City) basic financial statements presents a narrative overview and analysis of the financial activities of the City for the year ended June 30, 2016. We encourage readers to consider the information presented here in conjunction with additional information in our transmittal letter. Certain amounts presented as fiscal year 2014-15 summarized comparative financial information in the basic financial statements have been reclassified to conform to the presentation in the fiscal year 2015-16 basic financial statements.

FINANCIAL HIGHLIGHTS

The assets and deferred outflows of resources of the City exceeded its liabilities and deferred inflows of resources at the end of the fiscal year by approximately $8.00 billion (net position). Of this balance, $8.15 billion represents the City’s net investment in capital assets, $1.75 billion represents restricted net position, and unrestricted net position has a deficit of $1.90 billion. The City’s total net position increased by $1.44 billion, or 22.0 percent, from the previous fiscal year. Of this amount, total net investment in capital assets, restricted net position and unrestricted net position increased by $630.7 million or 8.4 percent, $353.0 million or 25.2 percent and $457.7 million or 19.4 percent, respectively.

The City’s governmental funds reported total revenues of $5.79 billion, which is a $444.2 million or 8.3 percent increase over the prior year. Within this, revenues from property taxes, business taxes, sales and use tax, intergovernmental grants, and other revenues grew by approximately $156.6 million, $49.0 million, $27.0 million, $47.0 million, and $141.1 million, respectively. At the same time, there was a decline in revenues from real property transfer tax of $45.5 million and hotel room tax of $6.6 million. Governmental funds expenditures totaled $5.07 billion for this period, a $281.2 million or 5.9 percent increase, reflecting increases in demand for governmental services of $415.3 million, an increase in debt service of $54.7 million and a decrease in capital outlay of $188.8 million.

At the end of the fiscal year, total fund balances for the governmental funds amounted to $2.84 billion, an increase of $546.5 million or 23.9 percent from prior year, primarily due to a strong growth in most revenues over a moderate increase of expenditures and other financing uses this year over last year.

The City’s total long-term debt, including all bonds, loans, commercial paper and capital leases increased by $516.7 million during this fiscal year. The City issued a total of $1.14 billion in bonds, certificates of participation and loans this year. Of this amount, a total of $321.9 million in general obligation bonds were issued for transportation and road improvement projects, seismic safety loan program, clean and safe neighborhood parks projects, earthquake safety and response projects and road repaving and street safety projects. The City also issued $123.6 million in refunding certifications of participation and $150.5 million in certificates of participation for War Memorial Veteran Building Seismic Upgrade and Improvements projects. The San Francisco International Airport issued $232.1 million in refunding revenue bonds for debt service savings. The Hetch Hetchy Power Enterprise issued $4.1 million new clean renewable energy bonds to fund certain qualified clean, renewable energy solar generation facilities in the City. The San Francisco Wastewater Enterprise issued $308.4 million in revenue refunding bonds to fund capital projects and pay off outstanding commercial paper notes. The balance of commercial paper issued to finance and refinance capital projects increased by $283.9 million in this fiscal year. Of this increase, $338.9 million represented business-type activities while net decreases of $55.0 million represented governmental activities.

The City early implemented the provisions of Governmental Accounting Standards Board (GASB) Statement No. 82, Pension Issues – an amendment of GASB Statements No. 67, No. 68, and No. 73 Accounting and Financial Reporting for Pensions. Statement No 82, treats Employer-Paid Member contributions as employee contributions rather than employer contributions. This resulted in a restatement due to change in accounting principle decreasing net position as of July 1, 2015 by $8.6 million.

3 CITY AND COUNTY OF SAN FRANCISCO Management’s Discussion and Analysis (Unaudited) (Continued) Year Ended June 30, 2016

OVERVIEW OF THE FINANCIAL STATEMENTS

This discussion and analysis are intended to serve as an introduction to the City’s basic financial statements. The City’s basic financial statements comprise three components: (1) Government-wide financial statements, (2) Fund financial statements, and (3) Notes to the financial statements. This report also contains other supplementary information in addition to the basic financial statements themselves. These various elements of the basic financial statements are related as shown in the graphic below. Organization of City and County of San Francisco Basic Financial Statements

Management's Discussion and Analysis (MD&A)

Government - wide Financial Fund Financial Statements Statements

Governmental Proprietary Fiduciary Funds Funds Funds Statement of Balance Statement of net position Statement of sheet net position fiduciary Financial Statement of Statement of net position

Section revenues, revenues, expenditures, and expenses, and changes in fund changes in Statement of Statement of balances fund net position changes in activities Budgetary fiduciary Statement of comparison net position cash flows statement

Notes to the Financial Statements Required Supplementary Information Other Than MD&A

4 CITY AND COUNTY OF SAN FRANCISCO Management’s Discussion and Analysis (Unaudited) (Continued) Year Ended June 30, 2016

The following table summarizes the major features of the financial statements. The overview section below also describes the structure and contents of each of the statements in more detail.

Fund Financial Statements Government - wide Fiduciary Statements Governmental Proprietary Scope Entire entity The day-to-day The day-to-day Instances in which (except operating activities of operating activities the City fiduciary funds) the City for basic of the City for administers governmental business-type resources on services enterprises behalf of others, such as employee benefits Accounting Accrual Modified accrual Accrual accounting Accrual accounting basis and accounting and accounting and and economic and economic measurement economic current financial resources focus resources focus; focus resources focus resources focus except agency funds do not have measurement focus Type of All assets, Balances of All assets, deferred All resources held balance deferred spendable resources outflows of in a trustee or information outflows of resources, agency capacity resources, liabilities, and for others liabilities, and deferred inflows of deferred inflows resources, both of resources, financial and both financial capital, short-term and capital, and long-term short-term and long-term Type of inflow All inflows and Near-term inflows and All inflows and All additions and and outflow outflows during outflows of spendable outflows during deductions during information year, regardless resources year, regardless of the year, of when cash is when cash is regardless of when received or paid received or paid cash is received or paid

Government-wide Financial Statements

The government-wide financial statements are designed to provide readers with a broad overview of the City’s finances, in a manner similar to a private-sector business.

The statement of net position presents information on all of the City’s assets, deferred outflows of resources, liabilities, and deferred inflows of resources, with the difference reported as net position. Over time, increases or decreases in net position may serve as a useful indicator of whether or not the financial position of the City is improving or deteriorating.

5 CITY AND COUNTY OF SAN FRANCISCO Management’s Discussion and Analysis (Unaudited) (Continued) Year Ended June 30, 2016

The statement of activities presents information showing how the City’s net position changed during the most recent fiscal year. All changes in net position are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods, such as revenues pertaining to uncollected taxes and expenses pertaining to earned but unused vacation and sick leave.

Both of the government-wide financial statements distinguish functions of the City that are principally supported by taxes and intergovernmental revenues (governmental activities) from other functions that are intended to recover all or a significant portion of their costs through user fees and charges (business-type activities). The governmental activities of the City include public protection, public works, transportation and commerce, human welfare and neighborhood development, community health, culture and recreation, general administration and finance, and general City responsibilities. The business-type activities of the City include an airport, port, transportation system (including parking), water and power operations, an acute care hospital, a long-term care hospital, and sewer operations.

The government-wide financial statements include not only the City itself (known as the primary government), but also a legally separate development authority, the Treasure Island Development Authority (TIDA), for which the City is financially accountable. Financial information for this component unit is reported separately from the financial information presented for the primary government. Included within the governmental activities of the government-wide financial statements are the San Francisco County Transportation Authority (Transportation Authority) and San Francisco Finance Corporation. Included within the business-type activities of the government-wide financial statements is the operation of the San Francisco Parking Authority. Although legally separate from the City, these component units are blended with the primary government because of their governance or financial relationships to the City. The City also considers the Successor Agency to the Redevelopment Agency (Successor Agency) as a fiduciary component unit of the City.

Fund Financial Statements

The fund financial statements are designed to report information about groupings of related accounts that are used to maintain control over resources that have been segregated for specific activities or objectives. The City, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. All of the funds of the City can be divided into the following three categories: governmental funds, proprietary funds, and fiduciary funds.

Governmental funds. Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements – i.e. most of the City’s basic services are reported in governmental funds. These statements, however, focus on (1) how cash and other financial assets can readily be converted to available resources and (2) the balances left at year-end that are available and the constraints for spending. Such information may be useful in determining what financial resources are available in the near future to finance the City’s programs.

Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. By doing so, readers may better understand the long-term impact of the government’s near-term financing decisions. Both the governmental funds balance sheet and the governmental funds statement of revenues, expenditures, and changes in fund balances provide a reconciliation to facilitate this comparison between governmental funds and governmental activities.

6 CITY AND COUNTY OF SAN FRANCISCO Management’s Discussion and Analysis (Unaudited) (Continued) Year Ended June 30, 2016

The City maintains several individual governmental funds organized according to their type (special revenue, debt service, capital projects and permanent funds). Information is presented separately in the governmental funds balance sheet and in the governmental funds statement of revenues, expenditures, and changes in fund balances for the General Fund, which is considered to be a major fund. Data from the remaining governmental funds are combined into a single, aggregated presentation. Individual fund data for each of the non-major governmental funds is provided in the form of combining statements elsewhere in this report. The City adopts a rolling two-year budget for its General Fund. A budgetary comparison statement has been provided for the General Fund to demonstrate compliance with this budget.

Proprietary funds. Proprietary funds are generally used to account for services for which the City charges customers – either outside customers, or internal units or departments of the City. Proprietary funds provide the same type of information as shown in the government-wide financial statements, only in more detail. The City maintains the following two types of proprietary funds:  Enterprise funds are used to report the same functions presented as business-type activities in the government-wide financial statements. The City uses enterprise funds to account for the operations of the San Francisco International Airport (SFO or Airport), San Francisco Water Enterprise (Water), Hetch Hetchy Water and Power (Hetch Hetchy), San Francisco Municipal Transportation Agency (SFMTA), San Francisco General Hospital (SFGH), San Francisco Wastewater Enterprise (Wastewater), Port of San Francisco (Port), and the Laguna Honda Hospital (LHH), all of which are considered to be major funds of the City.

 Internal Service funds are used to report activities that provide supplies and services for certain City programs and activities. The City uses internal service funds to account for its fleet of vehicles, management information and telecommunication services, printing and mail services, and for lease- purchases of equipment by the San Francisco Finance Corporation. Because these services predominantly benefit governmental rather than business-type functions, they have been included within governmental activities in the government-wide financial statements. The internal service funds are combined into a single, aggregated presentation in the proprietary fund financial statements. Individual fund data for the internal service funds is provided in the form of combining statements elsewhere in this report.

Fiduciary funds. Fiduciary funds are used to account for resources held for the benefit of parties outside the City. The City employees’ pension and health plans, retirees’ health care, the Successor Agency, the external portion of the Treasurer’s Office investment pool, and the agency funds are reported under the fiduciary funds. Since the resources of these funds are not available to support the City’s own programs, they are not reflected in the government-wide financial statements. The accounting used for fiduciary funds is much like that used for proprietary funds.

Notes to the Basic Financial Statements

The notes to the basic financial statements provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements.

Required Supplementary Information

In addition to the basic financial statements and accompanying notes, this report presents certain required supplementary information concerning the City’s net pension liability, pension contributions and progress in funding its obligation to provide other postemployment benefits to its employees and the City’s schedule of contributions for its employees’ other postemployment benefits.

7 CITY AND COUNTY OF SAN FRANCISCO Management’s Discussion and Analysis (Unaudited) (Continued) Year Ended June 30, 2016

Analysis of Net Position

The City’s total net position, which may serve as a useful indicator of the government’s financial position, was $8.00 billion at the end of fiscal year 2015-16, a 22.0 percent increase over the prior year. The City’s governmental activities account for $2.00 billion of this total and $6.00 billion stem from its business-type activities.

The largest portion of the City’s net position is the $8.15 billion in net investment in capital assets (e.g. land, buildings, and equipment). This reflects a $630.7 million or 8.4 percent increase over the prior year, and is due to the growth seen in the governmental activities and increases in all business-type activities. Since the City uses capital assets to provide services, these assets are not available for future spending. Further, the resources required to pay the outstanding debt must come from other sources since the capital assets themselves cannot be liquidated to pay that liability.

Another portion of the City’s net position is the $1.75 billion that represents restricted resources that are subject to external limitations regarding their use. The remaining portion of total net position is a deficit of $1.90 billion, which consists of a $2.07 billion deficit in governmental activities and $231.4 million deficit in business-type activities. The governmental activities and business-type activities deficit is largely due to recording net pension liability (see note 9). The governmental activities deficit also included $406.8 million in long-term bonds liabilities that fund the LHH rebuild project, certain park facilities projects at the Port, improvement projects for reliable emergency water supply for the Water Enterprise, and road paving and street safety in SFMTA (see Note 10(d)).

8 CITY AND COUNTY OF SAN FRANCISCO Management’s Discussion and Analysis (Unaudited) (Continued) Year Ended June 30, 2016

Governmental activities Business-type activities Total 2016 2015 2016 2015 2016 2015 Revenues Program revenues: Charges for services...... $ 777,182 $ 612,983 $ 3,230,367 $ 3,134,814 $ 4,007,549 $ 3,747,797 Operating grants and contributions...... 1,289,902 1,165,340 199,623 191,101 1,489,525 1,356,441 Capital grants and contributions...... 24,795 48,233 374,924 357,819 399,719 406,052 General revenues: Property taxes...... 1,808,917 1,640,383 - - 1,808,917 1,640,383 Business taxes...... 660,926 611,932 - - 660,926 611,932 Sales and use tax...... 270,051 240,424 - - 270,051 240,424 Hotel room tax...... 387,661 394,262 - - 387,661 394,262 Utility users tax...... 98,651 98,979 - - 98,651 98,979 Other local taxes...... 399,882 451,994 - - 399,882 451,994 Interest and investment income...... 24,048 20,737 28,566 25,999 52,614 46,736 Other...... 59,266 46,906 240,636 200,148 299,902 247,054 Total revenues...... 5,801,281 5,332,173 4,074,116 3,909,881 9,875,397 9,242,054

Expenses Public protection...... 1,222,549 1,108,200 - - 1,222,549 1,108,200 Public works, transportation and commerce...... 418,978 270,454 - - 418,978 270,454 Human welfare and neighborhood development...... 1,233,403 1,073,652 - - 1,233,403 1,073,652 Community health...... 747,071 735,040 - - 747,071 735,040 Culture and recreation...... 311,028 355,676 - - 311,028 355,676 General administration and finance...... 246,383 249,823 - - 246,383 249,823 General City responsibilities...... 113,490 94,577 - - 113,490 94,577 Unallocated Interest on long-term debt...... 115,357 115,030 - - 115,357 115,030 Airport...... - - 900,621 853,338 900,621 853,338 Transportation...... - - 1,106,420 1,018,251 1,106,420 1,018,251 Port...... - - 91,449 88,436 91,449 88,436 Water...... - - 470,254 438,885 470,254 438,885 Power...... - - 153,472 149,438 153,472 149,438 Hospitals...... - - 1,050,618 996,395 1,050,618 996,395 Sewer...... - - 244,289 239,556 244,289 239,556 Total expenses...... 4,408,259 4,002,452 4,017,123 3,784,299 8,425,382 7,786,751 Increase/(decrease) in net position before transfers...... 1,393,022 1,329,721 56,993 125,582 1,450,015 1,455,303 Transfers...... (671,173) (504,791) 671,173 504,791 - - Change in net position...... 721,849 824,930 728,166 630,373 1,450,015 1,455,303 Net position at beginning of year, as previously reported...... 1,287,214 462,284 5,278,250 4,647,877 6,565,464 5,110,161 Cumulative effect of accounting change...... - - (8,580) - (8,580) - Net position at beginning of year, as restated...... 1,287,214 462,284 5,269,670 4,647,877 6,556,884 5,110,161 Net position at end of year...... $ 2,009,063 $ 1,287,214 $ 5,997,836 $ 5,278,250 $ 8,006,899 $ 6,565,464

Analysis of Changes in Net Position

The City’s Change in Net Position decreased by $5.3 million in fiscal year 2015-16, a 0.4 percent decrease from the prior fiscal year, as noted above. The decrease in the change in net position was due to a $97.8 million increase from business-type activities offset by a $103.1 million decrease from governmental activities.

The City’s governmental activities experienced a $469.1 million or 8.8 percent growth in total revenues. This included noticeable increases in the following revenues: $164.2 charges for services, $124.6 million in operating grants and contributions, $168.5 million in property taxes, $49.0 million in business taxes and $29.6 million in sales and use tax. These were offset by decreases of $23.4 million in capital grants and contribution revenue and $52.1 million in other local tax revenue. The City’s governmental activities expenses reported an increase of $405.8 million or 10.1 percent this fiscal year. The net transfer to business-type activities increased by $166.4 million. A discussion of these and other changes is presented in the governmental activities and business-type activities sections that follow.

9 CITY AND COUNTY OF SAN FRANCISCO Management’s Discussion and Analysis (Unaudited) (Continued) Year Ended June 30, 2016

10 CITY AND COUNTY OF SAN FRANCISCO Management’s Discussion and Analysis (Unaudited) (Continued) Year Ended June 30, 2016

Governmental activities. Governmental activities increased the City’s total net position by approximately $721.8 million. Key factors contributing to this change are discussed below.

Overall, total revenues from governmental activities were $5.80 billion, a $469.1 million or 8.8 percent increase over the prior year. For the same period, expenses totaled $4.41 billion before transfers of $671.2 million, resulting in a total net position increase of $721.8 million by June 30, 2016.

Property tax revenues increased by $168.5 million or 10.3 percent. This growth was due in large part to regular annual tax and escape tax collections associated with higher assessed values of secured real property and unsecured property in San Francisco and also due to increase in supplemental property tax collections for both current year and prior year supplemental assessments. A decrease in real property transfer tax by $45.5 million made up the majority of the decline in other local taxes of $52.1 million.

Revenues from business and sales and use taxes totaled approximately $931.0 million, a growth of $78.6 million over the prior year. Business taxes grew by $49.0 million due to an increase in payroll tax revenue resulting from a 5.7 percent increase in employment and a 6.1 percent increase in average weekly wages in San Francisco. Increased business registration fee levels and gross receipts tax collection, due to Proposition E passed in November 2012, also significantly contributed to the growth in business taxes. Sales and use tax increased by $29.6 million is primarily due to the “triple flip” unwinding, in which 0.25 percent of the 1 percent Bradley Burns allocation was directed to property tax to pay for economic recovery bonds, with the remaining 0.75 percent being allocated to local sales tax. Beginning in January 2016, the entire 1 percent of Bradley Burns revenue has been allocated as sales tax. In addition, there was approximately 1 percent of underlying growth, which was restrained by unexpectedly flat auto sales, a decline in general consumer goods-related revenue, and declines in fuel tax due to both continued low gas prices and changes in jet fuel purchasing to lower-cost states.

Hotel room tax revenues declined by $6.6 million, or 1.7 percent, due to in prior fiscal year, the City received $34.0 million in previously unpaid short-term rental tax obligations. Excluding this payment, hotel room tax revenue would have seen growth over the prior year of 7.6 percent. Hotel room tax revenue growth is a function of changes in occupancy, Average Daily Room Rate (ADR), and room supply. Strong demand from all segments of the market (tourist, convention, and business), combined with no additions to inventory, have exerted upward pressure on both occupancy and ADR.

Operating grants and contributions increased $124.6 million. This was largely due to the increases from state sources, including $24.8 million for human welfare programs, $36.8 million for community health program grants, $49.5 million for public works programs, $8.9 million for public protection, $4.9 million for culture and recreation programs and $1.3 million for general administration and finance programs. These were offset by a slight decrease of $1.6 million in general city responsibilities programs.

Total charges for services increased $164.2 million, or 26.8 percent, and other revenues increased $12.4 million. The increase in total charges for services is driven by increased fee revenues across various departments, partially due to improved economic conditions. The more significant increases are discussed as follows. The City is addressing the need for affordable housing by increasing supply resulting in a $90 million increase in housing inclusionary fees. An increase in large housing projects in the South of Market District increased SOMA Stabilization impact fees by $12.5 million. The Department of Building Inspection’s permit revenue increased $12.7 million due to an increase in construction permits and project completion. Fire Department charges for services increased by $8.2 million due to ambulance billing recoveries, as well as plan check and inspection fees for developers. The Department of Public Works charges for services increased by $4.3 million largely due to curb reconstruction and assessments, as well as encroachment assessments. The Planning Department’s revenues grew by more than $4.6 million from increased building permits and planning case volume, as well as CPI adjustments to fees. In addition, an increase of $3.8 million in the citywide unallocated revenue was due to increased cost reimbursement of General Fund, consistent with the budgeted Full Cost Allocation Plan. The increase in other revenues is related to revenue received from the San Francisco Housing Authority much earlier than expected, as the Housing Authority’s permanent financing plan was enacted.

11 CITY AND COUNTY OF SAN FRANCISCO Management’s Discussion and Analysis (Unaudited) (Continued) Year Ended June 30, 2016

Interest and investment income revenue increased by $3.3 million, or 16.0 percent, due to increased balances in the City’s investment pool, primarily due to an increase in property tax revenues, business and sales tax revenues, and other revenues.

Net transfers from the governmental activities to business-type activities were $671.2 million, a 33.0 percent or $166.4 million increase from the prior year. This was mainly due to increased operating subsidies of $36.7 million from the General Fund to SFMTA and $85.1 million to SFGH, offset by a decrease of $18.5 million in General Fund subsidies to LHH. In addition, the Water Enterprise received $34.2 million in general obligation bond proceeds for the improvement of the Auxiliary Water Supply System, the Port received $21.7 million for parks and open spaces projects, and SFMTA received $61.9 million for road improvement and street safety projects.

The increase of total governmental expenses of $405.8 million, or 10.1 percent, was primarily due to increase in demand for the government’s services in almost all functional service by $453.9 million, which was partly offset by the decrease of expenses in culture and recreation and general administrative and finance functions by $48.1 million.

12 CITY AND COUNTY OF SAN FRANCISCO Management’s Discussion and Analysis (Unaudited) (Continued) Year Ended June 30, 2016

Business-type activities increased the City’s net position by $719.6 million and key factors contributing to this increase are:

 The San Francisco International Airport had an increase in net position at fiscal year-end of $49.9 million, compared to a $56.1 million increase in the prior year, a $6.2 million difference. Operating revenues totaled $867.0 million for fiscal year 2015-16, an increase of $51.6 million or 6.3 percent over the prior year and included increases of $30.8 million, $2.1 million, $11.7 million, and $7.0 million in aviation, concession, parking and transportation, and net sales and services revenues, respectively, reflecting traffic growth at the Airport. For the same period, the Airport’s operating expenses increased by $31.4 million, or 5.2 percent, for a net operating income of $226.5 million for the period. Net nonoperating activities saw a deficit of $144.5 million versus $141.8 million deficit in the prior year, a $2.6 million increase. The increase in both operating and non-operating expenses is due to increases in personnel, depreciation, and other non-operating expenses. Personnel costs increased $14.4 million due to cost of living adjustments and additional positions. Also, capital contributions decreased by $21.7 million due to a reduction in federal grants received.

 The City’s Water Enterprise, the third largest such entity in California, reported an increase in net position of $26.2 million at the end of fiscal year 2015-16, compared to an increase of $97.4 million at the end of the previous year, a $71.2 million difference. Revenues totaled $463.2 million, expenses totaled $470.3 million, and the net increase from capital contributions and transfers was $33.2 million. Compared to the prior year, total revenues decreased $24.8 million, which included $16.1 million in non-operating revenues. The primary reason for the decrease in water service revenues was due to a $19.3 million wholesale revenue adjustment and a 10.3% decrease in consumption, offset by adopted rate increases of 28.0% for wholesale customers and 12.0% for retail customers. Within expenses, the enterprise reported a total increase of $28.6 million in fiscal year 2015-16. This included an $11.3 million increase in depreciation expense from increased capitalized assets, a $1.3 million increase in general and administrative and other expenses, a $3.8 million increase in personnel services, $0.7 million increase in construction and engineering contractual services, $0.5 million increase in services provided by other departments, and $0.2 million for building and construction supplies.

 Hetch Hetchy Water and Power ended fiscal year 2015-16 with a net position increase of $25.7 million, compared to a $11.1 million increase the prior year, a difference of $14.6 million. This change consisted of increases in operating income of $12.4 million, non-operating income of $3.6 million, and a decrease of transfers from (to) the City of $1.4 million. This enterprise consists of two segments: Hetchy Water upcountry operations and water system, which reported a $2.3 million increase in change in net position, and Hetchy Power (also known as the Power Enterprise), which reported a $23.4 million increase in change in net position. Hetchy Water operating revenues decreased by $0.1 million while operating expenses decreased by $2.2 million. In addition, there was a $0.2 million decrease in water assessment fee revenue from the Water Enterprise in nonoperating revenue. Hetchy Power’s total revenues increased by $17.0 million mostly due to increases in sales of excess power of $9.3 million, $4.4 million from City Departments, and an increase of $3.3 million electricity sales from CleanPowerSF. On the operating expenses side, Hetchy Power reported an increase of $6.7 million due to increases of $3.5 million in purchased electricity, $3.0 million in transmission and distribution power costs, $2.5 million in project spending, $1.4 million in services provided by other departments, $0.8 million in materials and electrical supplies, $0.4 million in personnel services mainly due to cost of living adjustments and pension costs and $0.4 million in personnel services mainly due to cost of living adjustments and pension costs and $0.4 million higher taxes, licenses and permits related to national park service. These increases were offset by decreases of $2.4 million in contractual services, $1.8 million in judgments and claims mainly due to prior year one-time settlement of franchise tax fees, and $1.1 million in depreciation.

 The City’s Wastewater Enterprise’s net position increased by $13.9 million, compared to a $29.3 million increase the prior year, a $15.4 million change. Operating revenues increased by $5.8 million due to a $4.6 million increase in charges for services as a result of an average 5% adopted rate increase, a $0.4 million increase from other City departments, as well as increased capacity fees and an increase in permit applications. Operating expenses increased by $5.1 million due to increases of $3.1 million in Sewer System Improvement Program (SSIP) and repair and replacement project expenses, $2.7

13 CITY AND COUNTY OF SAN FRANCISCO Management’s Discussion and Analysis (Unaudited) (Continued) Year Ended June 30, 2016

million in personnel services mainly due to cost of living adjustments, health and pension costs, $2.1 million in pollution remediation obligations, $1.2 million in higher building and equipment maintenance services, $0.5 in depreciation expense, and $0.4 million in materials and supplies, which were offset by decreases of $4.9 million in general and administrative expenses mainly due to lower judgment and claims liability based on actuarial estimate. Transfers out increased by $16.3 million due to a transfer to the General Fund in order to secure jurisdiction of the City owned property adjacent to the Southeast Water Pollution Control Plant. This was offset by a transfer in of $0.5 million and a net nonoperating expense of $0.3 million.

 The Port ended fiscal year 2015-16 with a net position increase of $35.1 million, compared to a $11.8 million increase in the previous year, a $23.3 million difference. The Port is responsible for seven and one-half miles of waterfront property and its revenue is derived primarily from property rentals to commercial and industrial enterprises and a diverse mix of maritime operations. In fiscal year 2015-16, operating revenues increased $4.4 million and included a net increase in property rentals of $1.8 million and an increase in cruise revenues of $2.7 million. Operating expenses increased $3.1 million over the prior year. This was due in part to a $2.0 million increase in the cost of services from other departments and a net increase of $1.5 million in personnel and other expenses. The above changes were offset by an increase of $0.4 million in interest expense.

 The SFMTA had an increase in net position of $478.3 million for fiscal year 2015-16 before cumulative effect of accounting change, compared to an increase of $294.7 million in the prior year, a $183.6 million change. SFMTA’s total operating revenues were $495.3 million, while total operating expenses reached $1.10 billion. Operating revenues decreased by $4.3 million compared to the prior year and is mainly due to lower passenger fare revenue of $8.0 million, a slight decrease in rental income of $0.8 million, and $3.6 million in other revenues which consists primarily of taxi medallion revenue. These decreases were offset by an increase of $7.8 million in parking permit, fines, and penalties, and an increase in charges for services of $0.3 million. Operating expenses increased by $88.8 million primarily due to personnel costs. Net nonoperating revenue increased by $39.8 million mainly due to transit impact developer fees. An increase of capital contributions of $91.1 million is due to an increase in capital expenditures incurred and billable to grantors mostly related to Central Subway, revenue vehicles procurement, and other large projects. Net transfers in increased by $145.8 million due to a $36.7 million increase in transfers from the City’s General Fund mainly for operating subsidies and an increase of $99.7 million in transfers from nonmajor governmental funds and a decrease in transfers out of $9.4 million. Transfers from nonmajor governmental funds included $123.8 million for capital activities and street improvement projects. In fiscal year 2015-16, the City elected early implementation of GASB Statement No. 82, resulting in a restatement of SFMTA’s 2014-15 results, reducing the beginning net position in the amount of $8.6 million.

 LHH, the City’s skilled nursing care hospital, had an increase in net position of $21.6 million at the end of fiscal year 2015-16, compared to an increase of $6.6 million at the end of the previous year, a $15.0 million difference. The LHH’s loss before capital contributions and transfers for the year was $22.7 million versus a loss of $61.5 million for the prior year. This change of $38.8 million was mostly due to a $48.8 million increase in operating revenues, a $8.6 million increase in operating expenses, and a $1.3 million decrease in other non-operating revenues. This was offset by a $23.9 million decrease in net transfers from the City this fiscal year.

 SFGH, the City’s acute care hospital, ended fiscal year 2015-16 with a net position increase of $77.6 million, compared to a $123.4 million increase the prior year, a $45.8 million change. This was due to decreased capital contributions of $5.0 million compared to prior year’s capital contributions of $57.4 million. However, SFGH incurred an operating loss of $89.6 million, which was a $66.0 million increase from the prior year. This was due to a $21.2 million decrease in operating revenues, largely related to net patient services revenues; and increases in operating expenses mostly due to $26.2 million in personal services, $7.2 million in contractual services, and $10.9 million in depreciation and amortization.

14 CITY AND COUNTY OF SAN FRANCISCO Management’s Discussion and Analysis (Unaudited) (Continued) Year Ended June 30, 2016

FINANCIAL ANALYSIS OF THE CITY’S FUNDS

As noted earlier, the City uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements.

Governmental Funds

The focus of the City’s governmental funds statements is to provide information on near-term inflows, outflows, and balances of resources available for future spending. Such information is useful in assessing the City’s financing requirements. In particular, unrestricted fund balance may serve as a useful measure of a government’s net resources available for spending at the end of the fiscal year. Types of governmental funds reported by the City include the General Fund, Special Revenue Funds, Debt Service Funds, Capital Project Funds, and the Permanent Fund.

At the end of fiscal year 2015-16, the City governmental funds reported combined fund balances of $2.84 billion, an increase of $546.5 million or 23.9 percent over the prior year. Of the total fund balances, $945.7 million is assigned and $138.0 million is unassigned. The total of $1.08 million or 38.2 percent of the total fund balances constitutes the fund balances that are accessible to meet the City’s needs. Within these fund balance classifications, the General Fund had an assigned fund balance of $879.6 million. The remainder of the governmental fund balances includes $0.1 million nonspendable for items that are not expected to be converted to cash such as inventories and long-term loans, $1.56 billion restricted for programs at various levels and $187.2 million committed for other reserves.

The General Fund is the chief operating fund of the City. As a measure of liquidity, both the sum of assigned and unassigned fund balances and total fund balance can be compared to total fund expenditures. As of the end of the fiscal year, assigned and unassigned fund balances totaled $1.12 billion while total fund balance reached $1.43 billion. Combined assigned and unassigned fund balances represent 33.7 percent of total expenditures, while total fund balance represents 43.0 percent of total expenditures. For the year, the General Fund’s total revenues exceeded expenditures by $1.03 billion, before transfers and other items of $748.4 million, resulting in total fund balance increasing by $284.0 million. Overall, the significant growth in revenues, particularly in property taxes, business taxes, sales and uses tax and charges for services were offset by an increased rate of expenditure growth due to growing demand for services and personnel costs across City functions and resulted in an increased fund balance this fiscal year.

Proprietary Funds

The City’s proprietary fund statements provide the same type of information found in the business-type activities section of the government-wide financial statements but with some additional detail.

At the end of fiscal year 2015-16, the unrestricted net position for the proprietary funds was as follows: Airport: $36.0 million, Water Enterprise: $26.5 million, Hetch Hetchy Water and Power: $141.1 million, Wastewater Enterprise: $38.0 million, and the Port: $57.1 million. In addition, SFMTA, San Francisco General Hospital, and Laguna Honda Hospital had deficits in unrestricted net position of $3.4 million, $341.4 million, and $185.5 million, respectively.

15 CITY AND COUNTY OF SAN FRANCISCO Management’s Discussion and Analysis (Unaudited) (Continued) Year Ended June 30, 2016

The following table shows actual revenues, expenses and the results of operations for the current fiscal year in the City’s proprietary funds (in thousands). This shows that the total net position for these funds increased by approximately $728.2 million due to the current year financial activities. Reasons for this change are discussed in the previous section on the City’s business-type activities.

Non- Ope rating Operating Capital Interfund Change In Ope rating Operating Income Re ve nue s Contributions Transfers, Ne t Re ve nue s Expenses (Loss) (Expense) and Others Ne t Position Airport...... $ 866,991 $ 640,473 $ 226,518 $ (144,463) $ 10,424 $ (42,542) $ 49,937 Water...... 419,516 314,786 104,730 (111,771) - 33,244 26,203 Hetch Hetchy...... 164,736 148,495 16,241 8,759 - 680 25,680 Municipal Transportation Agency.... 495,296 1,100,234 (604,938) 206,529 357,871 518,795 478,257 General Hospital...... 717,053 806,694 (89,641) 53,520 5,000 108,681 77,560 Wastew ater Enterprise...... 261,775 221,553 40,222 (10,309) - (16,025) 13,888 Port...... 99,733 86,793 12,940 (3,594) 1,629 24,100 35,075 Laguna Honda Hospital...... 205,267 235,841 (30,574) 7,900 - 44,240 21,566 Total...... $ 3,230,367 $ 3,554,869 $ (324,502) $ 6,571 $ 374,924 $ 671,173 $ 728,166

Fiduciary Funds

The City maintains fiduciary funds for the assets of the San Francisco Employees’ Retirement System, Health Service System and Retiree Health Care Trust, and manages the investment of monies held in trust to benefit public service employees. At the end of fiscal year 2015-16, the net position of the Retirement System, Health Service System and Retiree Health Care Trust combined totaled $20.34 billion, representing a $244.7 million decrease from the prior year, and 1.2 percent change. The decrease is a result of benefit payments greater than contributions offset by net investment income. The Private-Purpose Trust Fund accounts for the Successor Agency, which had a net deficit of $377.0 million at year’s end. This 11.4 percent, or $48.4 million, decrease in the net deficit is due to increases in developer payments and the sale of the Jessie Square parking garage. The Investment Trust Fund’s net position was $743.9 million at year’s end, and the 37.8 percent increase represents the excess of contributions over distribution to external participants.

General Fund Budgetary Highlights

The City’s final budget differs from the original budget in that it contains carry-forward appropriations for various programs and projects, and supplemental appropriations approved during the fiscal year.

During the year, actual revenues and other resources were $138.2 million higher than the final budget. The City realized $101.3 million, $24.6 million, $17.4 million, $15.4 million, $13.6 million, and $5.1 million more revenue than budgeted in property taxes, business taxes, other resources, charges for services, other grants and subventions, and utility users tax, respectively. These increases were partly offset by reductions of $28.9 million, $7.2 million, $5.4 million, and $5.0 million, in transfers from other funds, real property transfer tax, health and welfare realignment, and sales and use tax, respectively.

Differences between the final budget and the actual (budgetary basis) expenditures resulted in $158.5 million in expenditure savings. Major factors include:  $85.3 million in savings from the Department of Public Health due to delays in contracting and hiring for vacant positions creating additional salary and fringe benefit savings, and prior year encumbrance closeouts.  $36.5 million in savings from the Human Services Agency, due largely to operating savings in salaries and benefits from delays in hiring, contract savings, reductions in aid assistance and aid payments resulting from a mid-year change in budgeting, and lower than expected caseload levels.

16 CITY AND COUNTY OF SAN FRANCISCO Management’s Discussion and Analysis (Unaudited) (Continued) Year Ended June 30, 2016

 $11.8 million savings in contracts and salary and benefits mainly in General Services Administration, Treasurer/Tax Collector, Assessor/Recorder, City Planning, City Attorney, Board of Supervisors, Elections, and other departments in general administration and finance.  $10.1 million in salary and benefit savings mainly in Juvenile Probation, Adult Probation, Sheriff, Emergency Communications and other departments in public protection.  The remaining lower than budgeted expenditures are savings from public works, transportation and commerce, and culture and recreation.

The net effect of substantial revenue increases, savings in expenditures and reduction in reserve deposits was a budgetary fund balance available for subsequent year appropriation of $435.2 million at the end of fiscal year 2015-16. The City’s fiscal year 2016-17 and 2017-18 Adopted Original Budget assumed an available balance of $363.3 million fully appropriated in fiscal year 2016-17 and fiscal year 2017-18 leaving $11.9 million available for future appropriations. (See also Note 4 to the Basic Financial Statements for additional budgetary fund balance details).

Capital Assets and Debt Administration

Capital Assets

The City’s capital assets for its governmental and business-type activities as of June 30, 2016, increased by $1.20 billion, 6.1 percent, to $20.82 billion (net of accumulated depreciation). Capital assets include land, buildings and improvements, machinery and equipment, park facilities, roads, streets, bridges, and intangible assets. Governmental activities contributed $250.6 million or 21.0 percent to this total increase while $945.6 million or 79.0 percent was from business-type activities. Details are shown in the table below. Business-type Governmental Activities Activities Total 2016 2015 2016 2015 2016 2015 Land...... $ 334,261 $ 299,911 $ 217,441 $ 217,441 $ 551,702 $ 517,352 Construction in progress...... 456,093 1,245,064 3,120,461 3,104,166 3,576,554 4,349,230 Facilities and improvements... 3,372,183 2,544,116 10,484,335 9,716,578 13,856,518 12,260,694 Machinery and equipment...... 201,333 76,202 1,112,860 926,979 1,314,193 1,003,181 Infrastructure...... 686,365 659,502 701,029 719,240 1,387,394 1,378,742 Intangible asset...... … 75,117 49,915 59,691 65,802 134,808 115,717 Total………………………$ 5,125,352 $ 4,874,710 $ 15,695,817 $ 14,750,206 $ 20,821,169 $ 19,624,916

Major capital asset events during the current fiscal year included the following:

 Under governmental activities, net capital assets increased by $250.6 million or 5.1 percent. The City issued $713.4 million in Commercial Paper to provide financing for various capital projects, including the purchase of capital equipment for San Francisco General Hospital, the Veterans Building seismic upgrades, and the Moscone Center expansion. Approximately $1.1 billion in construction in progress work was substantially completed and capitalized as facilities and improvement and infrastructure. The completed projects include capitalization of approximately $848.0 million for the new San Francisco General Hospital Rebuild Project and approximately $135.8 million for the seismic upgrade of the Veterans building. The remaining completed projects include public works, intangible assets, and traffic signal projects.

17 CITY AND COUNTY OF SAN FRANCISCO Management’s Discussion and Analysis (Unaudited) (Continued) Year Ended June 30, 2016

 The Water Enterprise’s net capital assets increased by $245.2 million or 5.3 percent, reflecting an increase in construction and capital improvement activities. Major additions to construction work in progress included Calaveras Dam Replacement, Regional Groundwater Storage and Recovery, the Harry Tracy Water Treatment Plan Long-Term Improvements, Auxiliary Water Supply System, San Francisco Groundwater Supply, Peninsula Pipeline Seismic Upgrade, Irvington Tunnel Alternatives, and other upgrade and improvement programs. As of June 30, 2016, the Water Enterprise is 90% through construction of its multi-billion dollar, multi-year program to upgrade the Hetch Hetchy Regional and Local Water Systems. The program consists of 35 local projects within San Francisco and 52 regional projects spread over seven different counties from the Sierra foothills to San Francisco. As of June 30, 2016, 34 local projects are completed and the target completion date is December 2016. For regional projects, 36 are completed and the expected completion date is December 2019. The Water System Improvement Program (WSIP) delivers capital improvements that enhance the Water Enterprise’s ability to provide reliable, affordable, high quality drinking water to its customers.

 SFMTA’s net capital assets increased by $400.7 million or 14.6% mainly from construction in progress of $212.7 million for the new Central Subway Project, Central Control, rail replacement, transit lane and street improvement projects. Equipment costs of $283.1 million was incurred during the fiscal year for the procurement of new light rail vehicles, trolley and motor buses to replace the old fleet, upgrade of communications system, traffic signals, radio replacement, and various information systems development. Building cost totaling $36.2 million was incurred in fiscal year 2016 for Islais Creek facility improvement, transit operator convenience stations, elevator and escalator modernization, and upgrade of garage facilities in various locations.

 Laguna Honda Hospital’s net capital assets decreased by $15.0 million or 2.8 percent due primarily to depreciation expense being greater than asset additions. Laguna Honda Hospital provides 780 resident beds in three state of the art buildings on Laguna Honda’s 62-acre campus. The 500,000 square foot facility received silver certification by the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) program, becoming the first green-certified hospital in California.

 SFGH’s net capital assets increased by $61.0 million or 49.1 percent primarily due to the increases in the acquisition of capital assets for the hospital. As of June 30, 2016, General Obligation Bonds in the amount of $887.4 million have been sold to fund the hospital rebuild. During the period of July 2015 - June 2016, construction of the new hospital was completed and reached substantial completion on August 18, 2015. Patients were moved into the new hospital on May 21, 2016. The General Obligation Bonds are accounted for as governmental activity and transactions are accounted for in the City's Governmental Capital Projects Funds. Upon completion of the new facility, it was capitalized and recorded under governmental activities.

 The Wastewater Enterprise net capital assets reported an increase of $126.9 million or 6.6 percent mainly in completed construction activities. These include the Northshore to Channel Force Main, Ocean Side Treatment Plant Improvements, Southeast Treatment Plant Oxygen Generate Plant Replacement, and other capital projects throughout the system. The San Francisco Public Utilities Commission is underway with the initial phase of the Sewer System Improvement Program, a multi- year and multi-billion dollar investment to upgrade the aging sewer system to provide a reliable, sustainable, and seismically safe sewer system. The $7.0 billion program includes three phases over the span of next 20 years.

 Hetch Hetchy’s net of accumulated depreciation and amortization, increased by $30.9 million or 8.3% to $404.2 million primarily due to additions of facilities, improvements, machinery, and equipment for Moccasin Facilities Upgrade, Transmission and Distribution System, Lower Cherry Aqueduct, Streetlight Replacement, Server Building projects, and San Joaquin Pipeline Rehabilitation. The Hetchy System Improvement Program is a long-term capital program from 2012 to 2025 and includes projects, varying in scope and complexity, to address necessary work on water transmission, hydroelectric generation and power transmission facilities in Tuolumne, Mariposa, Stanislaus, San Joaquin and Alameda counties, essential to continued delivery of both water and power.

18 CITY AND COUNTY OF SAN FRANCISCO Management’s Discussion and Analysis (Unaudited) (Continued) Year Ended June 30, 2016

 The Airport’s net capital assets increased $109.2 million or 2.8 percent primarily due to the capitalization of capital improvement project costs. The Airport has five- and ten-year Capital Plans to build new facilities, improve existing facilities, renovate buildings, repair or replace infrastructure, preserve assets, enhance safety and security, develop systems functionality, and perform needed maintenance. Significant projects in design or under construction in fiscal year 2017 include the Terminal 1 (T1) Redevelopment Program which includes the redevelopment of Boarding Area B, the expansion of the T1 Central Area, and a new baggage handling system, in addition to the Terminal 3 (T3) Redevelopment Program which creates a unified T3 checkpoint and constructs a new secure connector and office block. Other notable ongoing projects include the on-airport hotel, a new consolidated administration campus building, a second long-term parking garage, and a new industrial waste treatment plant.

 The Port’s net capital assets decreased by $13.3 million or 3.0 percent due to capitalization and depreciation of capital improvements in 2015, including the James R. Herman Cruise Terminal at Pier 27. Pier 35 Building and Roof project provided for the upgrade of two elevators and essential water intrusion work (roofing, flashing, window and door weather stripping repairs) in several areas in the Pier 35 bulkhead and the shed building. Pier 49, Wharf J1 Under-Pier Sewer Replacement project’s scope included the replacement of all existing under-pier gravity main and branch sewer lines serving six Port tenant restaurants at Pier 49 Wharf J1. The security improvements through the installation and deployment of closed-circuit television (CCTV) and integrated access control/intrusion detection systems at key Port facilities continue in phases, largely based on priority and available funding. The opening of the Bayview Gateway was celebrated with a ribbon-cutting ceremony on September 18, 2015. It is a one-acre passive green open space at the intersection of Cargo Way and Third Street near Pier 90.

At the end of the year, the City’s business-type activities had approximately $1.20 billion in commitments for various capital projects. Of this, Water Enterprise had an estimated $283.3 million, SFMTA had $567.2 million, Wastewater had $190.7 million, Airport had $75.8 million, Hetch Hetchy had $63.6 million, Port had $15.1 million, Laguna Honda Hospital had $0.7 million and the General Hospital had $4.2 million. In addition, there was approximately $88.0 million reserved for encumbrances in capital project funds for the general government projects.

For government-wide financial statement presentation, all depreciable capital assets were depreciated from acquisition date to the end of the current fiscal year. Governmental fund financial statements record capital asset purchases as expenditures.

Additional information about the City’s capital assets can be found in Note 7 to the Basic Financial Statements.

Debt Administration

At the end of the June 30, 2016, the City had total long-term and commercial paper debt outstanding of $14.39 billion. Of this amount, $2.22 billion is general obligation bonds secured by ad valorem property taxes without limitation as to rate or amount upon all property subject to taxation by the City and $12.17 billion is revenue bonds, commercial papers, certificates of participation and other debts of the City secured solely by specified revenue sources. As noted previously, the City’s total long-term debt including all bonds, loans, commercial paper notes and capital leases increased by $516.7 million or 3.7 percent during the fiscal year.

19 CITY AND COUNTY OF SAN FRANCISCO Management’s Discussion and Analysis (Unaudited) (Continued) Year Ended June 30, 2016

The net increase in debt obligations in the governmental activities was $152.1 million primarily due to the issuance of $321.9 million of general obligation bonds to finance 1) the improvements to the City’s transportation system, streets and roads; 2) improvements to park, open space and recreational facilities; 3) repairs and seismic improvements to better prepare San Francisco for a major earthquake or natural disaster. The City likewise issued $150.5 million certificates of participation to refinance commercial paper notes used to finance the renovation and seismic retrofit of the War Memorial Veterans Building. The City refunded $123.6 million certificates of participation which financed the acquisition of certain office buildings occupied by various City departments for debt service savings.

The business-type activities net debt increase was $364.6 million primarily due to issuance of $338.9 million commercial paper notes by the Airport, Water Enterprise, Wastewater Enterprise and the San Francisco General Hospital for interim financing of various projects. The Wastewater Enterprise issued $308.4 million revenue bonds to finance wastewater capital projects and the Hetch Hetchy Power Enterprise issued $4.1 million energy bonds to fund certain solar generation facilities at the Marina Middle School and the San Francisco Police Academy. The Airport issued $232.1 million in revenue refunding bonds for economic gain.

The City’s Charter imposes a limit on the amount of general obligation bonds the City can have outstanding at any given time. That limit is three percent of the assessed value of taxable property in the City – estimated at $194.30 billion in value as of the close of the fiscal year. As of June 30, 2016, the City had $2.22 billion in authorized, outstanding general obligation bonds, which is equal to approximately 1.10 percent of gross (1.15 percent of net) taxable assessed value of property. As of June 30, 2016, there were an additional $1.62 billion in bonds that were authorized but unissued. If all of these general obligation bonds were issued and outstanding in full, the total debt burden would be approximately 1.90 percent of gross (1.98 percent of net) taxable assessed value of property.

The City’s underlying ratings on general obligation bonds as of June 30, 2016 were:

Moody’s Investors Service, Inc. Aa1 Standard & Poor’s AA+ Fitch Ratings AA+

During the fiscal year, Moody’s Investors Service (Moody’s) and Standard & Poor’s affirmed the City’s ratings of “Aa1” and “AA+”, respectively, with Stable Outlook. Fitch Ratings upgraded it’s rating of “AA” to “AA+”, and revised the rating outlook to Stable from Positive on all the City’s outstanding general obligation bonds.

The City’s enterprise activities carried upgraded underlying debt ratings for the SFMTA of “Aa2” and “AA” from Moody’s and Standard & Poor’s, respectively. Moody’s, Standard and Poor’s and Fitch Ratings affirmed their underlying credit ratings of the Airport of “A1”, “A+” and “A+” with Stable Rating Outlooks, respectively. The Water Enterprise carried underlying ratings of “Aa3” and “AA-” and the Wastewater Enterprise carried underlying ratings of “Aa3” and “AA” from Moody’s and Standard and Poor’s respectively of June 30, 2016.

In October 2016, Moody’s Investors Service upgraded the City’s Lease Revenue Bonds and Certificates of Participation from Aa3 to Aa2 for those secured by “more essential assets”, and also upgraded the City’s Lease Revenue Refunding bonds from Aa3 to Aa2, including Series 2008-1 and 2008-2, despite the “less essential” nature of the leased assets securing the bonds, because they are a demonstrated, stable non- pledged revenue source that provides strong coverage of debt service payments. Moody’s also upgraded the rating on the City’s Equipment Leases from A1 to Aa2, because of the strong lease structure where the lease term matches the useful life of the leased assets.

Additional information in the City's long-term debt can be found in Note 8 to the Basic Financial Statements.

20 CITY AND COUNTY OF SAN FRANCISCO Management’s Discussion and Analysis (Unaudited) (Continued) Year Ended June 30, 2016

Economic factors and future budgets and rates

San Francisco has continued to experience improvement in the economy during the fiscal year. The following economic factors were considered in the preparation of the City’s budget for fiscal years 2016-17 and 2017-18. This two-year budget was adopted by the Mayor and the Board of Supervisors. It is a rolling budget for all departments, except for the Airport, PUC enterprises, SFMTA, the Port of San Francisco and Child Support Services, which each have a fixed two-year budget.

 The City’s average unemployment for fiscal year 2015-16 was 3.4 percent, a decrease of 0.5 percent from the average unemployment rate in fiscal year 2014-15.

 Housing prices, residential and commercial rent, hotel revenues, and retail sales all continued to show strong growth. The average median home price in fiscal year 2015-16 was $1.1 million up 10.4 percent from the previous fiscal year. Residential and commercial rents also grew by 4.9 percent and 6.5 percent, respectively, from the prior fiscal year.

 The hotel sector saw continued growth in fiscal year 2015-16 over the prior year. Annual average hotel room occupancy grew to 87.7 percent in fiscal year 2015-16 while average daily room rates grew by 5.7 percent over the prior year.

 The City’s taxable sales have also continued to grow, with fiscal year 2015-16 sales tax revenue up 11.2 percent over fiscal year 2014-15.

The Board of Supervisors approved a final two-year budget for fiscal years 2016-17 and 2017-18 in July 2016, which assumes use of prior year fund balance from General Fund of $172.1 million and $191.2 million, respectively.

21 CITY AND COUNTY OF SAN FRANCISCO Management’s Discussion and Analysis (Unaudited) (Continued) Year Ended June 30, 2016

REQUESTS FOR INFORMATION

This financial report is designed to provide our citizens, taxpayers, customers, and investors and creditors with a general overview of the City’s finances and to demonstrate the City’s accountability for the money it receives. Below are the contacts for questions about this report or requests for additional financial information.

City and County of San Francisco Office of the Controller 1 Dr. Carlton B. Goodlett Place, Room 316 San Francisco, CA 94102-4694

Individual Department Financial Statements

San Francisco International Airport Port of San Francisco Office of the Airport Deputy Director Public Information Officer Business and Finance Division Pier 1, The Embarcadero PO Box 8097 San Francisco, CA 94111 San Francisco, CA 94128

San Francisco Water Enterprise Laguna Honda Hospital Hetch Hetchy Water and Power Chief Financial Officer San Francisco Wastewater Enterprise 375 Laguna Honda Blvd. Chief Financial Officer San Francisco, CA 94116 525 Golden Gate Avenue San Francisco, CA 94102

Municipal Transportation Agency Health Service System SFMTA Finance and Information Technology Chief Financial Officer Services 1145 Market Street, Suite 300 1 South Van Ness Avenue, 8th Floor San Francisco, CA 94103 San Francisco, CA 94103

Zuckerberg San Francisco San Francisco General Hospital and Trauma Center Employees’ Retirement System Chief Financial Officer Executive Director 1001 Potrero Avenue, Suite 2A7 1145 Market Street, 5th Floor San Francisco, CA 94110 San Francisco, CA 94103

Successor Agency to the San Francisco Redevelopment Agency 1 South Van Ness Avenue, 5th Floor San Francisco, CA 94103

Blended Component Units Financial Statements

San Francisco County Transportation Authority San Francisco Finance Corporation Deputy Director for Administration and Finance Office of Public Finance 1455 Market Street, 22nd Floor City Hall, Room 336 San Francisco, CA 94103 1 Dr. Carlton B. Goodlett Place San Francisco, CA 94102

WWW.SFGOV.ORG

22 CITY AND COUNTY OF SAN FRANCISCO Statement of Net Position June 30, 2016 (In Thousands)

Primary Government Component Unit Treasure Island Governmental Business- Development Activities Type Activities Total Authority ASSETS Current assets: Deposits and investments with City Treasury...... $ 3,314,988 $ 2,370,166 $ 5,685,154 $ 11,130 Deposits and investments outside City Treasury...... 84,845 16,494 101,339 - Receivables (net of allowance for uncollectible amounts of $220,815 for the primary government): Property taxes and penalties...... 77,241 - 77,241 - Other local taxes...... 278,763 - 278,763 - Federal and state grants and subventions...... 303,316 225,984 529,300 - Charges for services...... 99,972 232,251 332,223 1,130 Interest and other...... 16,455 199,453 215,908 12 Due from component units...... 2,437 594 3,031 - Inventories...... - 102,000 102,000 - Other assets...... 7,121 3,163 10,284 - Restricted assets: Deposits and investments with City Treasury...... - 250,115 250,115 - Deposits and investments outside City Treasury...... 25,349 312,380 337,729 - Grants and other receivables...... - 21,138 21,138 - Total current assets...... 4,210,487 3,733,738 7,944,225 12,272 Noncurrent assets: Loan receivables (net of allowance for uncollectible amounts of $1,121,995)...... 81,801 - 81,801 - Advance to component units...... 17,496 2,827 20,323 - Other assets...... 6 12,660 12,666 - Restricted assets: Deposits and investments with City Treasury...... - 697,292 697,292 - Deposits and investments outside City Treasury...... - 423,364 423,364 - Grants and other receivables...... - 24,114 24,114 - Capital assets: Land and other assets not being depreciated...... 821,524 3,349,945 4,171,469 5,529 Facilities, infrastructure and equipment, net of depreciation...... 4,303,828 12,345,872 16,649,700 17 Total capital assets...... 5,125,352 15,695,817 20,821,169 5,546 Total noncurrent assets...... 5,224,655 16,856,074 22,080,729 5,546 Total assets...... 9,435,142 20,589,812 30,024,954 17,818

DEFERRED OUTFLOWS OF RESOURCES Unamortized loss on refunding of debt...... 18,373 105,229 123,602 - Deferred outflows on derivative instruments...... - 83,614 83,614 - Deferred outflows related to pensions...... 386,187 301,184 687,371 22 Total deferred outflows of resources...... $ 404,560 $ 490,027 $ 894,587 $ 22

The notes to the financial statements are an integral part of this statement. 23 CITY AND COUNTY OF SAN FRANCISCO Statement of Net Position (Continued) June 30, 2016 (In Thousands)

Primary Government Component Unit Treasure Island Governmental Business- Development Activities Type Activities Total Authority LIABILITIES Current liabilities: Accounts payable...... $ 361,180 $ 270,548 $ 631,728 $ 4,126 Accrued payroll...... 91,124 71,008 162,132 - Accrued vacation and sick leave pay...... 85,868 64,822 150,690 - Accrued workers' compensation...... 39,357 31,867 71,224 - Estimated claims payable...... 53,627 52,808 106,435 - Bonds, loans, capital leases, and other payables...... 276,685 574,729 851,414 - Accrued interest payable...... 13,208 52,885 66,093 - Unearned grant and subvention revenues...... 24,250 - 24,250 - Due to primary government...... - - - 420 Internal balances...... 21,995 (21,995) - - Unearned revenues and other liabilities...... 494,854 621,224 1,116,078 1,488 Liabilities payable from restricted assets: Bonds, loans, capital leases, and other payables...... - 373,378 373,378 - Accrued interest payable...... - 31,475 31,475 - Other...... - 173,084 173,084 - Total current liabilities...... 1,462,148 2,295,833 3,757,981 6,034 Noncurrent liabilities: Accrued vacation and sick leave pay...... 65,159 43,791 108,950 - Accrued workers' compensation...... 188,468 157,736 346,204 - Other postemployment benefits obligation...... 1,202,986 878,590 2,081,576 - Estimated claims payable...... 106,871 64,260 171,131 - Bonds, loans, capital leases, and other payables...... 3,017,840 10,151,025 13,168,865 - Advance from primary government...... - - - 5,721 Unearned revenues and other liabilities...... 2,022 94,414 96,436 - Derivative instruments liabilities...... - 96,132 96,132 - Net pension liability...... 1,355,280 976,938 2,332,218 24 Total noncurrent liabilities...... 5,938,626 12,462,886 18,401,512 5,745 Total liabilities...... 7,400,774 14,758,719 22,159,493 11,779

DEFERRED INFLOWS OF RESOURCES Unamortized gain on refunding of debt...... 236 337 573 - Unamortized gain on leaseback transaction...... - 4,349 4,349 - Deferred inflows related to pensions...... 429,629 318,598 748,227 3 Total deferred inflows of resources...... 429,865 323,284 753,149 3

NET POSITION Net investment in capital assets, Note 10(d)...... 2,750,782 5,690,741 8,151,422 5,546 Restricted for: Reserve for rainy day...... 120,106 - 120,106 - Debt service...... 83,029 127,073 210,102 - Capital projects, Note 10(d)...... 198,962 340,896 423,132 - Community development...... 433,398 - 433,398 - Transportation Authority activities...... 15,657 - 15,657 - Building inspection programs...... 134,663 - 134,663 - Children and families...... 105,177 - 105,177 - Culture and recreation...... 110,292 - 110,292 - Grants...... 84,332 - 84,332 - Other purposes...... 45,900 70,505 116,405 - Total restricted...... 1,331,516 538,474 1,753,264 - Unrestricted (deficit), Note 10(d)...... (2,073,235) (231,379) (1,897,787) 512 Total net position...... $ 2,009,063 $ 5,997,836 $ 8,006,899 $ 6,058

The notes to the financial statements are an integral part of this statement. 24 CITY AND COUNTY OF SAN FRANCISCO Statement of Activities Year Ended June 30, 2016 (In Thousands)

Net (Expense) Revenue and Changes in Net Position Program Revenues Primary Government Component Unit Operating Capital Business- Treasure Island Charges for Grants and Grants and Governmental Type Development Functions/Programs Expenses Services Contributions Contributions Activities Activities Total Author ity Primary government: Governmental activities: Public protection...... $ 1,222,549 $ 86,164 $ 191,215 $ - $ (945,170) $ - $ (945,170) $ - Public works, transportation and commerce...... 418,978 130,410 125,081 22,520 (140,967) - (140,967) - Human welfare and neighborhood development...... 1,233,403 273,986 639,475 - (319,942) - (319,942) - Community health...... 747,071 90,078 310,895 - (346,098) - (346,098) - Culture and recreation...... 311,028 98,205 6,236 2,275 (204,312) - (204,312) - General administration and finance...... 246,383 52,417 6,680 - (187,286) - (187,286) - General City responsibilities...... 113,490 45,922 10,320 - (57,248) - (57,248) - Unallocated interest on long- term debt and cost of issuance... 115,357 - - - (115,357) - (115,357) - Total governmental activities...... 4,408,259 777,182 1,289,902 24,795 (2,316,380) - (2,316,380) - Business-type activities: Airport...... 900,621 866,991 - 10,424 - (23,206) (23,206) - Transportation...... 1,106,420 495,296 144,422 357,871 - (108,831) (108,831) - Port...... 91,449 99,733 177 1,629 - 10,090 10,090 - Water...... 470,254 419,516 1,720 - - (49,018) (49,018) - Power...... 153,472 164,736 - - - 11,264 11,264 - Hospitals...... 1,050,618 922,320 53,304 5,000 - (69,994) (69,994) - Sewer...... 244,289 261,775 - - - 17,486 17,486 - Total business-type activities...... 4,017,123 3,230,367 199,623 374,924 - (212,209) (212,209) - Total primary government...... $ 8,425,382 $ 4,007,549 $ 1,489,525 $ 399,719 (2,316,380) (212,209) (2,528,589) -

Component unit: Treasure Island Development Authority...... $ 11,153 $ 11,842 $ -$ - $ 689

General Revenues Taxes: Property taxes...... 1,808,917 - 1,808,917 - Business taxes...... 660,926 - 660,926 - Sales and use tax...... 270,051 - 270,051 - Hotel room tax...... 387,661 - 387,661 - Utility users tax...... 98,651 - 98,651 - Parking tax...... 86,012 - 86,012 - Real property transfer tax...... 269,090 - 269,090 - Other local taxes...... 44,780 - 44,780 - Interest and investment income...... 24,048 28,566 52,614 62 Other...... 59,266 240,636 299,902 - Transfers - internal activities of primary government...... (671,173) 671,173 - - Total general revenues and transfers...... 3,038,229 940,375 3,978,604 62 Change in net position...... 721,849 728,166 1,450,015 751 Net position at beginning of year, as previously reported...... 1,287,214 5,278,250 6,565,464 5,307 Cumulative effect of accounting change...... - (8,580) (8,580) - Net position at beginning of year, as restated...... 1,287,214 5,269,670 6,556,884 5,307 Net position at end of year...... $ 2,009,063 $ 5,997,836 $ 8,006,899 $ 6,058

The notes to the financial statements are an integral part of this statement. 25 CITY AND COUNTY OF SAN FRANCISCO Balance Sheet Governmental Funds June 30, 2016 (With comparative financial information as of June 30, 2015) (In Thousands)

Other Governmental General Fund Funds Total Governmental Funds 2016 2015 2016 2015 2016 2015 Assets: Deposits and investments with City Treasury...... $ 1,723,488 $ 1,292,562 $ 1,556,236 $ 1,308,000 $ 3,279,724 $ 2,600,562 Deposits and investments outside City Treasury...... 3,183 8,880 81,662 98,659 84,845 107,539 Receivables (net of allowance for uncollectible amounts of $191,320 in 2016; $155,505 in 2015): Property taxes and penalties...... 61,564 53,171 15,677 12,142 77,241 65,313 Other local taxes...... 260,070 249,887 18,693 28,509 278,763 278,396 Federal and state grants and subventions...... 197,391 161,373 105,925 96,195 303,316 257,568 Charges for services...... 81,303 68,318 18,616 21,326 99,919 89,644 Interest and other...... 5,014 28,184 10,808 3,327 15,822 31,511 Due from other funds...... 4,596 5,848 7,466 6,334 12,062 12,182 Due from component unit...... 920 948 1,517 2,978 2,437 3,926 Advance to component unit...... - 23,212 17,496 19,753 17,496 42,965 Loans receivable (net of allowance for uncollectible amounts of $1,121,995 in 2016; $1,004,667 in 2015) 6,473 3,560 75,328 73,140 81,801 76,700 Other assets...... 15 1,193 6,840 7,570 6,855 8,763 Total assets...... $ 2,344,017 $ 1,897,136 $ 1,916,264 $ 1,677,933 $ 4,260,281 $ 3,575,069

Liabilities: Accounts payable...... $ 229,248 $ 171,002 $ 124,473 $ 136,739 $ 353,721 $ 307,741 Accrued payroll...... 74,020 57,045 15,242 12,067 89,262 69,112 Unearned grant and subvention revenues...... 6,099 5,902 18,151 13,402 24,250 19,304 Due to other funds...... 1,599 639 32,097 19,681 33,696 20,320 Unearned revenues and other liabilities...... 439,522 347,054 55,274 53,806 494,796 400,860 Bonds, loans, capital leases, and other payables...... - - 102,778 157,766 102,778 157,766 Total liabilities...... 750,488 581,642 348,015 393,461 1,098,503 975,103

Deferred inflows of resources...... 164,367 170,298 161,937 140,725 326,304 311,023

Fund balances: Nonspendable...... 522 24,786 82 329 604 25,115 Restricted...... 120,106 114,969 1,443,956 1,110,836 1,564,062 1,225,805 Committed...... 187,170 142,815 - - 187,170 142,815 Assigned...... 879,567 705,076 66,085 66,740 945,652 771,816 Unassigned...... 241,797 157,550 (103,811) (34,158) 137,986 123,392 Total fund balances...... 1,429,162 1,145,196 1,406,312 1,143,747 2,835,474 2,288,943 Total liabilities, deferred inflows of resources and fund balances...... $ 2,344,017 $ 1,897,136 $ 1,916,264 $ 1,677,933 $ 4,260,281 $ 3,575,069

The notes to the financial statements are an integral part of this statement. 26 CITY AND COUNTY OF SAN FRANCISCO Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Position June 30, 2016 (In Thousands)

Fund balances – total governmental funds $ 2,835,474

Amounts reported for governmental activities in the statement of net position are different because: Capital assets used in governmental activities are not financial resources and, therefore, are not reported in the funds. 5,114,367 Long-term liabilities, including bonds payable, are not due and payable in the current period and therefore are not reported in the governmental funds. (4,710,404) Other long-term assets are not available to pay for current-period expenditures and, therefore, are deferred inflows of resources and are recognized as revenues in the period the amounts become available in the governmental funds. 326,310 Interest on long-term debt is not accrued in the funds, but rather is recognized as an expenditure when due. (11,893) Deferred outflows and inflows of resources in governmental activities are not financial resources and, therefore, are not reported in the governmental funds. 17,046 Net pension liability and pension related deferred outflows and inflows of resources are not due in the current period and therefore are not reported in the governmental funds. (1,374,202) Internal service funds are used by management to charge the costs of capital lease financing, fleet management, printing and mailing services, and information systems to individual funds. The assets and liabilities of internal service funds are included in governmental activities in the statement of net position. (187,635)

Net position of governmental activities $ 2,009,063

The notes to the financial statements are an integral part of this statement. 27 CITY AND COUNTY OF SAN FRANCISCO Statement of Revenues, Expenditures, and Changes in Fund Balances Governmental Funds Year Ended June 30, 2016 (With comparative financial information as of June 30, 2015) (In Thousands)

Other Governmental General Fund Funds Total Governmental Funds 2016 2015 2016 2015 2016 2015 Revenues: Property taxes...... $ 1,393,574 $ 1,272,623 $ 405,202 $ 369,536 $ 1,798,776 $ 1,642,159 Business taxes...... 659,086 609,614 1,840 2,318 660,926 611,932 Sales and use tax...... 167,915 140,146 99,528 100,278 267,443 240,424 Hotel room tax...... 387,661 394,262 - - 387,661 394,262 Utility users tax...... 98,651 98,979 - - 98,651 98,979 Parking tax...... 86,012 87,209 - - 86,012 87,209 Real property transfer tax...... 269,090 314,603 - - 269,090 314,603 Other local taxes...... 44,780 50,182 - - 44,780 50,182 Licenses, permits and franchises...... 27,909 27,789 15,813 15,170 43,722 42,959 Fines, forfeitures, and penalties...... 8,985 6,369 27,184 21,785 36,169 28,154 Interest and investment income...... 9,613 7,867 14,318 12,716 23,931 20,583 Rents and concessions...... 46,553 24,339 89,312 74,763 135,865 99,102 Intergovernmental: Federal...... 231,098 230,434 185,725 234,762 416,823 465,196 State...... 667,450 620,877 109,416 130,697 776,866 751,574 Other...... 2,272 3,153 83,600 12,621 85,872 15,774 Charges for services...... 233,976 215,036 158,689 144,008 392,665 359,044 Other...... 22,291 9,162 242,431 114,443 264,722 123,605 Total revenues...... 4,356,916 4,112,644 1,433,058 1,233,097 5,789,974 5,345,741 Expenditures: Current: Public protection...... 1,204,666 1,148,405 64,334 61,752 1,269,000 1,210,157 Public works, transportation and commerce...... 136,762 87,452 279,390 206,547 416,152 293,999 Human welfare and neighborhood development...... 853,924 786,362 398,664 309,057 1,252,588 1,095,419 Community health...... 666,138 650,741 110,474 103,091 776,612 753,832 Culture and recreation...... 124,515 119,278 240,394 233,574 364,909 352,852 General administration and finance...... 223,844 208,695 53,885 42,675 277,729 251,370 General City responsibilities...... 114,663 98,620 21 38 114,684 98,658 Debt service: Principal retirement...... - - 252,456 200,497 252,456 200,497 Interest and other fiscal charges...... - - 119,723 121,371 119,723 121,371 Bond issuance costs...... - - 7,108 2,734 7,108 2,734 Capital outlay...... - - 223,904 412,740 223,904 412,740 Total expenditures...... 3,324,512 3,099,553 1,750,353 1,694,076 5,074,865 4,793,629 Excess (deficiency) of revenues over (under) expenditures... 1,032,404 1,013,091 (317,295) (460,979) 715,109 552,112 Other financing sources (uses): Transfers in...... 209,494 164,712 371,243 391,575 580,737 556,287 Transfers out...... (962,343) (873,741) (289,457) (187,345) (1,251,800) (1,061,086) Issuance of bonds and loans: Face value of bonds issued...... - - 595,925 449,530 595,925 449,530 Face value of loans issued...... - - - 136,763 - 136,763 Premium on issuance of bonds...... - - 32,845 69,833 32,845 69,833 Payment to refunded bond escrow agent...... - - (131,935) (359,225) (131,935) (359,225) Other financing sources-capital leases...... 4,411 5,572 1,239 2,178 5,650 7,750 Total other financing sources (uses)...... (748,438) (703,457) 579,860 503,309 (168,578) (200,148) Net changes in fund balances...... 283,966 309,634 262,565 42,330 546,531 351,964 Fund balances at beginning of year...... 1,145,196 835,562 1,143,747 1,101,417 2,288,943 1,936,979 Fund balances at end of year...... $ 1,429,162 $ 1,145,196 $ 1,406,312 $ 1,143,747 $ 2,835,474 $ 2,288,943

The notes to the financial statements are an integral part of this statement. 28 CITY AND COUNTY OF SAN FRANCISCO Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities Year Ended June 30, 2016 (In Thousands)

Net changes in fund balances - total governmental funds $546,531

Amounts reported for governmental activities in the statement of activities are different because: Governmental funds report capital outlays as expenditures. However, in the statement of activities the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount by which capital outlays exceeded depreciation and loss on disposal of capital assets in the current period. 249,229 Some expenses reported in the statement of activities do not require the use of current financial resources and therefore are not reported as expenditures in governmental funds. This is the amount by which the increase in certain liabilities reported in the statement of net position of the previous year exceeded expenses reported in the statement of activities that do not require the use of current financial resources. (155,660) Property taxes are recognized as revenues in the period the amounts become available. This is the current period amount by which the deferred inflows of resources decreased in the governmental funds. 10,141 Other revenues that were unavailable are reported as deferred inflows of resources in the governmental funds. This is the current period amount by which deferred inflows of resources decreased in the governmental funds. 175 Governmental funds report revenues and expenditures primarily pertaining to long-term loan activities, which are not reported in the statement of activities. These activities are reported at the government-wide level in the statement of net position. This is the net expenditures reported in the governmental funds. 5,068 Changes to net pension liability and pension related deferred outflows and inflows of resources do not require the use of current financial resources and therefore are not reported as expenditures in governmental funds. 282,088 The issuance of long-term debt and capital leases provides current financial resources to governmental funds, while the repayment of the principal of long-term debt and capital leases consume the current financial resources of governmental funds. These transactions, however, have no effect on net position. This is the amount by which bond and other debt proceeds exceeded principal retirement in the current period. (211,534) Bond premiums are reported in the governmental funds when the bonds are issued, and are capitalized and amortized in the statement of net position. This is the amount of bond premiums capitalized during the current period. (32,845) Interest expense in the statement of activities differs from the amount reported in the governmental funds because of additional accrued and accreted interest; amortization of bond discounts, premiums and refunding losses and gains. 16,063 The activities of internal service funds are reported with governmental activities. 12,593

Change in net position of governmental activities $ 721,849

The notes to the financial statements are an integral part of this statement. 29 CITY AND COUNTY OF SAN FRANCISCO Budgetary Comparison Statement - General Fund Year Ended June 30, 2016 (In Thousands)

Actual Variance Original Budgetary Positive Budget Final Budget Basis (Negative) Budgetary Fund Balance, July 1 $ 183,249 $ 1,236,090 $ 1,236,090 $ - Resources (Inflows): Property taxes...... 1,291,000 1,291,000 1,392,278 101,278 Business taxes...... 634,460 634,460 659,086 24,626 Other local taxes: Sales and use tax...... 172,937 172,937 167,915 (5,022) Hotel room tax...... 384,090 384,090 387,661 3,571 Utility users tax...... 93,550 93,550 98,651 5,101 Parking tax...... 89,727 89,727 86,012 (3,715) Real property transfer tax...... 276,280 276,280 269,090 (7,190) Other local taxes...... 45,951 45,951 44,780 (1,171) Licenses, permits and franchises: Licenses and permits...... 10,361 10,361 10,956 595 Franchise tax...... 16,802 16,802 16,953 151 Fines, forfeitures, and penalties...... 4,577 4,550 8,985 4,435 Interest and investment income...... 10,680 10,680 15,073 4,393 Rents and concessions: Garages - Recreation and Park...... 8,963 8,963 9,986 1,023 Rents and concessions - Recreation and Park...... 6,009 6,009 6,525 516 Other rents and concessions...... 460 460 1,727 1,267 Intergovernmental: Federal grants and subventions...... 242,894 240,649 237,800 (2,849) State subventions: Social service subventions...... 106,451 105,678 105,888 210 Health / mental health subventions...... 156,238 155,871 157,788 1,917 Health and welfare realignment...... 245,529 245,529 240,131 (5,398) Public safety sales tax...... 97,957 97,957 97,039 (918) Other grants and subventions...... 51,462 51,462 65,054 13,592 Other...... 3,656 3,851 2,639 (1,212) Charges for services: General government service charges...... 66,140 66,140 69,007 2,867 Public safety service charges...... 36,543 39,547 47,106 7,559 Recreation charges - Recreation and Park...... 19,566 19,572 20,570 998 MediCal, MediCare and health service charges...... 93,236 94,369 98,350 3,981 Other financing sources: Transfers from other funds...... 206,782 235,416 206,499 (28,917) Repayment of loan from Component Unit...... 918 918 - (918) Other resources (inflows)...... 31,084 31,084 48,503 17,419 Subtotal - Resources (Inflows) 4,404,303 4,433,863 4,572,052 138,189 Total amounts available for appropriation...... 4,587,552 5,669,953 5,808,142 138,189

The notes to the financial statements are an integral part of this statement. 30 CITY AND COUNTY OF SAN FRANCISCO Budgetary Comparison Statement - General Fund (Continued) Year Ended June 30, 2016 (In Thousands)

Actual Variance Original Budgetary Positive Budget Final Budget Basis (Negative) Charges to Appropriations (Outflows): Public Protection Adult Probation...... $ 29,748 $ 28,866 $ 26,809 $ 2,057 District Attorney...... 45,890 45,756 45,550 206 Emergency Communications...... 54,021 51,229 49,732 1,497 Fire Department...... 329,039 333,066 332,821 245 Juvenile Probation...... 39,959 35,541 32,608 2,933 Police Department...... 477,298 480,431 479,929 502 Public Defender...... 31,515 31,329 30,904 425 Sheriff...... 182,424 173,053 171,491 1,562 Superior Court...... 31,715 31,736 31,034 702 Subtotal - Public Protection 1,221,609 1,211,007 1,200,878 10,129

Public Works, Transportation and Commerce Board of Appeals...... 929 941 861 80 Business and Economic Development...... 29,293 26,459 25,522 937 General Services Agency - Public Works...... 131,324 108,098 107,977 121 Public Utilities Commission...... - 1,432 1,044 388 Municipal Transportation Agency...... - 1,358 1,358 - Subtotal - Public Works, Transportation and Commerce 161,546 138,288 136,762 1,526

Human Welfare and Neighborhood Development Children, Youth and Their Families...... 35,414 32,912 32,912 - Commission on the Status of Women...... 6,399 6,573 6,568 5 County Education Office...... 116 116 116 - Environment...... 20 123 123 - Human Rights Commission...... 2,614 2,478 2,223 255 Human Services...... 812,492 800,743 764,273 36,470 Mayor - Housing/Neighborhoods...... 42,963 49,124 47,422 1,702 Subtotal - Human Welfare and Neighborhood Development 900,018 892,069 853,637 38,432

Community Health Public Health...... 787,554 751,416 666,138 85,278

Culture and Recreation Academy of Sciences...... 5,235 5,370 5,365 5 Arts Commission...... 10,091 9,102 9,102 - Asian Art Museum...... 9,603 9,382 9,019 363 Fine Arts Museum...... 15,780 15,099 14,551 548 Law Library...... 1,612 1,613 1,395 218 Recreation and Park Commission...... 94,741 84,687 84,687 - Subtotal - Culture and Recreation 137,062 125,253 124,119 1,134

The notes to the financial statements are an integral part of this statement. 31 CITY AND COUNTY OF SAN FRANCISCO Budgetary Comparison Statement - General Fund (Continued) Year Ended June 30, 2016 (In Thousands)

Actual Variance Original Budgetary Positive Budget Final Budget Basis (Negative) General Administration and Finance Assessor/Recorder...... $ 20,975 $ 20,638 $ 19,306 $ 1,332 Board of Supervisors...... 14,505 14,190 13,197 993 City Attorney...... 12,550 12,761 11,677 1,084 City Planning...... 37,407 36,807 36,753 54 Civil Service...... 813 666 581 85 Controller...... 12,058 15,782 15,467 315 Elections...... 18,531 17,853 16,905 948 Ethics Commission...... 3,927 3,375 3,064 311 General Services Agency - Administrative Services...... 62,317 55,327 51,846 3,481 General Services Agency - Technology...... 5,534 2,936 2,820 116 Health Service System...... 463 438 - 438 Human Resources...... 13,226 15,811 15,646 165 Mayor...... 5,506 5,546 5,546 - Retirement Services...... 1,132 875 875 - Treasurer/Tax Collector...... 34,964 32,642 30,159 2,483 Subtotal - General Administration and Finance 243,908 235,647 223,842 11,805

General City Responsibilities General City Responsibilities...... 136,881 113,672 113,672 - Other financing uses: Debt service...... 2,372 26 - 26 Transfers to other funds...... 929,615 962,511 962,264 247 Budgetary reserves and designations...... 66,987 9,907 - 9,907 Total charges to appropriations...... 4,587,552 4,439,796 4,281,312 158,484 Total Sources less Current Year Uses...... $ - $ 1,230,157 $ 1,526,830 $ 296,673

Budgetary fund balance, June 30 before reserves and designations $ 1,526,830 Reserves and designations made from budgetary fund balance not available for appropriation (869,272) Reserves for Litigation and Contingencies and General Reserves (222,356) Net Available Budgetary Fund Balance, June 30 $ 435,202

Sources/inflows of resources Actual amounts (budgetary basis) "available for appropriation"...... $ 5,808,142 Difference - budget to GAAP: The fund balance at the beginning of the year is a budgetary resource but is not a current year revenue for financial reporting purposes...... (1,236,090) Property tax revenue - Teeter Plan net change from prior year...... 1,296 Change in unrealized gain/(loss) on investments...... (798) Interest earnings / charges from other funds assigned to General Fund as interest adjustment...... (4,662) Interest earnings from other funds assigned to General Fund as other revenues...... 1,746 Grants, subventions and other receivables received after 60-day recognition period...... (6,303) Prepaid lease revenue, Civic Center Garage...... 84 Transfers from other funds are inflows of budgetary resources, but are not revenues for financial reporting purposes...... (206,499) Total revenues as reported on the statement of revenues, expenditures and changes in fund balance - General Fund...... $ 4,356,916

Uses/outflows of resources Actual amounts (budgetary basis) "total charges to appropriations"...... $ 4,281,312 Difference - budget to GAAP: Capital asset purchases funded under capital leases with Finance Corporation and other vendors...... 4,411 Recognition of expenditures for advances and imprest cash and capital asset acquisition for internal service fund...... 1,053 Transfers to other funds are outflows of budgetary resources but are not expenditures for financial reporting purposes...... (962,264) Total expenditures as reported on the statement of revenues, expenditures and changes in fund balance - General Fund...... $ 3,324,512

The notes to the financial statements are an integral part of this statement. 32 CITY AND COUNTY OF SAN FRANCISCO Statement of Net Position - Proprietary Funds June 30, 2016 (With comparative financial information as of June 30, 2015) (In Thousands)

DEFERRED OUTFLOWS OF RESOURCES Unamortized loss on refunding of debt...... 68,100 36,184 - - - 945 - - 105,229 118,867 1,091 1,171 Deferred outflows on derivative instruments...... 83,614 ------83,614 65,408 - - Deferred outflows related to pensions...... 43,982 32,695 8,324 98,333 67,677 14,589 6,467 29,117 301,184 259,933 7,475 6,199 Total deferred outflows of resources...... 195,696 68,879 8,324 98,333 67,677 15,534 6,467 29,117 490,027 444,208 8,566 7,370

The notes to the financial statements are an integral part of this statement. 33 CITY AND COUNTY OF SAN FRANCISCO Statement of Net Position - Proprietary Funds (Continued) June 30, 2016 (With comparative financial information as of June 30, 2015) (In Thousands)

DEFERRED INFLOWS OF RESOURCES Unamortized gain on refunding of debt...... - - - 337 - - - - 337 393 - - Unamortized gain on leaseback transaction...... - - - 4,349 - - - - 4,349 16,141 - - Deferred inflows related to pensions...... 48,154 36,577 8,678 99,620 72,374 16,301 7,158 29,736 318,598 671,917 7,829 16,569 Total deferred inflows of resources...... 48,154 36,577 8,678 104,306 72,374 16,301 7,158 29,736 323,284 688,451 7,829 16,569

NET POSITION Net investment in capital assets...... (117,377) 543,327 369,764 2,938,712 147,924 1,098,723 304,396 405,272 5,690,741 5,117,679 10,985 9,572 Restricted: Debt service...... 35,462 12,122 306 17,999 - 981 - 60,203 127,073 100,923 - - Capital projects...... 212,931 40,743 1,409 - 31,882 18,205 26,152 9,574 340,896 358,745 - - Other purposes...... - - - 67,644 - - - 2,861 70,505 35,986 - - Unrestricted (deficit)...... 36,057 26,476 141,135 (3,398) (341,339) 38,031 57,122 (185,463) (231,379) (335,083) (26,427) (26,646) Total net position...... $ 167,073 $ 622,668 $ 512,614 $ 3,020,957 $ (161,533) $ 1,155,940 $ 387,670 $ 292,447 $ 5,997,836 $ 5,278,250 $ (15,442) $ (17,074)

The notes to the financial statements are an integral part of this statement. 34 CITY AND COUNTY OF SAN FRANCISCO Statement of Revenues, Expenses, and Changes in Fund Net Position – Proprietary Funds Year Ended June 30, 2016 (With comparative financial information as of June 30, 2015) (In Thousands)

Business-Type Activities - Enterprise Funds Major Funds San San Hetch General San Governmental Francisco Francisco Hetchy Municipal Hospital Francisco Port of Laguna Activities - Internal International Water Water and Transportation Medical Wastewater San Honda Total Service Funds Airport Enterprise Power Age ncy Center Enterprise Francisco Hospital 2016 2015 2016 2015 Operating revenues: Aviation...... $ 495,439 $ - $ - $ - $ - $ - $ - $ - $ 495,439 $ 464,610 $ - $ - Water and power service...... - 393,582 164,474 - - - - - 558,056 547,595 - - Passenger fees...... - - - 205,374 - - - - 205,374 213,328 - - Net patient service revenue...... - - - - 709,622 - - 203,674 913,296 886,190 - - Sewer service...... - - - - - 249,203 - - 249,203 244,604 - - Rents and concessions...... 146,872 12,081 262 7,766 2,588 753 74,615 - 244,937 238,823 176 156 Parking and transportation...... 136,743 - - 221,073 - - 21,504 - 379,320 360,677 - - Other charges for services...... - - - 22,054 - - - - 22,054 21,786 136,820 128,670 Other revenues...... 87,937 13,853 - 39,029 4,843 11,819 3,614 1,593 162,688 157,201 - - Total operating revenues...... 866,991 419,516 164,736 495,296 717,053 261,775 99,733 205,267 3,230,367 3,134,814 136,996 128,826 Operating expenses: Personal services...... 241,162 103,027 45,815 677,174 460,860 79,088 30,851 180,814 1,818,791 1,701,386 49,472 45,629 Contractual services...... 68,064 13,451 6,395 124,780 202,697 15,069 5,895 9,657 446,008 412,282 51,813 45,180 Light, heat and power...... 22,925 - 26,792 - - - 2,146 - 51,863 44,987 - - Materials and supplies...... 16,419 12,896 3,040 81,417 76,271 10,192 1,468 19,993 221,696 210,179 19,513 18,875 Depreciation and amortization...... 228,359 106,666 16,513 133,715 17,263 50,799 21,924 15,356 590,595 552,101 2,798 2,451 General and administrative...... 3,369 17,878 40,489 42,695 1,071 30,248 4,058 - 139,808 142,621 540 540 Services provided by other departments...... 19,946 60,868 9,451 61,959 48,621 36,157 19,092 10,021 266,115 249,202 5,886 6,987 Other...... 40,229 - - (21,506) (89) - 1,359 - 19,993 37,737 5,780 5,083 Total operating expenses...... 640,473 314,786 148,495 1,100,234 806,694 221,553 86,793 235,841 3,554,869 3,350,495 135,802 124,745 Operating income (loss)...... 226,518 104,730 16,241 (604,938) (89,641) 40,222 12,940 (30,574) (324,502) (215,681) 1,194 4,081 Nonoperating revenues (expenses): Operating grants: Federal...... - 1,720 - 10,555 - - 177 264 12,716 17,307 - - State / other...... - - - 133,867 53,040 - - - 186,907 173,794 41 - Interest and investment income...... 13,957 3,595 1,280 5,410 1,882 1,185 884 373 28,566 25,999 4,263 4,708 Interest expense...... (208,597) (153,258) (3,355) (6,186) (1,402) (22,251) (4,656) (6,681) (406,386) (390,866) (4,589) (5,022) Other nonoperating revenues...... 101,728 38,382 12,456 62,883 - 11,242 1 13,944 240,636 200,148 833 1,459 Other nonoperating expenses...... (51,551) (2,210) (1,622) - - (485) - - (55,868) (42,938) - - Total nonoperating revenues (expenses)...... (144,463) (111,771) 8,759 206,529 53,520 (10,309) (3,594) 7,900 6,571 (16,556) 548 1,145 Income (loss) before capital contributions and transfers...... 82,055 (7,041) 25,000 (398,409) (36,121) 29,913 9,346 (22,674) (317,931) (232,237) 1,742 5,226 Capital contributions...... 10,424 - - 357,871 5,000 - 1,629 - 374,924 357,819 - - Transfers in...... - 34,368 1,385 523,489 240,120 460 24,132 51,355 875,309 669,300 5 150 Transfers out...... (42,542) (1,124) (705) (4,694) (131,439) (16,485) (32) (7,115) (204,136) (164,509) (115) (142) Change in net position...... 49,937 26,203 25,680 478,257 77,560 13,888 35,075 21,566 728,166 630,373 1,632 5,234 Net position (deficit) at beginning of year, as previously reported...... 117,136 596,465 486,934 2,551,280 (239,093) 1,142,052 352,595 270,881 5,278,250 4,647,877 (17,074) (22,308) Cumulative effect of accounting change...... - - - (8,580) - - - - (8,580) - - - Net position (deficit) at beginning of year, as restated... 117,136 596,465 486,934 2,542,700 (239,093) 1,142,052 352,595 270,881 5,269,670 4,647,877 (17,074) (22,308) Net position (deficit) at end of year...... $ 167,073 $ 622,668 $ 512,614 $ 3,020,957 $ (161,533) $ 1,155,940 $ 387,670 $ 292,447 $ 5,997,836 $ 5,278,250 $ (15,442) $ (17,074)

The notes to the financial statements are an integral part of this statement. 35 CITY AND COUNTY OF SAN FRANCISCO Statement of Cash Flows – Proprietary Funds Year Ended June 30, 2016 (With comparative financial information as of June 30, 2015) (In Thousands)

Business-Type Activities - Enterprise Funds Major Funds San San Hetch General San Governmental Francisco Francisco Hetchy Municipal Hospital Francisco Port of Laguna Activities - Internal International Water Water and Transportation Medical Wastewater San Honda Total Service Funds Airport Enterprise Power Age ncy Center Enterprise Francisco Hospital 2016 2015 2016 2015 Cash flows from operating activities: Cash received from customers, including cash deposits...... $ 891,569 $ 419,841 $ 162,934 $ 540,781 $ 679,797 $ 260,321 $ 22,597 $ 145,555 $ 3,123,395 $ 3,266,566 $ 159,994 $ 159,542 Cash received from tenants for rent...... - 12,285 269 7,805 2,587 729 74,384 - 98,059 113,081 - - Cash paid for employees' services...... (254,837) (113,188) (46,422) (697,634) (475,504) (81,182) (33,004) (190,409) (1,892,180) (1,869,684) (51,530) (49,772) Cash paid to suppliers for goods and services...... (194,383) (106,441) (78,985) (336,058) (332,154) (80,789) (36,165) (40,220) (1,205,195) (1,106,969) (91,029) (87,781) Cash paid for judgments and claims...... - (11,561) (4,640) (11,714) - (168) - - (28,083) (27,311) - - Net cash provided by (used in) operating activities...... 442,349 200,936 33,156 (496,820) (125,274) 98,911 27,812 (85,074) 95,996 375,683 17,435 21,989 Cash flows from noncapital financing activities: Operating grants...... - 117 19 141,495 54,068 3,611 310 264 199,884 202,711 41 - Transfers in...... - 34,368 1,385 461,622 240,120 460 - 51,355 789,310 642,548 5 150 Transfers out...... (42,542) (1,124) (705) (4,694) (131,439) (16,485) (32) (7,115) (204,136) (164,509) (115) (142) Other noncapital financing sources...... 2,597 5,262 11,312 40,001 - 4,244 - - 63,416 42,946 - - Other noncapital financing uses...... (38,460) (2,211) (1,744) - (168) (485) - - (43,068) (37,413) - - Net cash provided by (used in) noncapital financing activities...... (78,405) 36,412 10,267 638,424 162,581 (8,655) 278 44,504 805,406 686,283 (69) 8 Cash flows from capital and related financing activities: Capital grants and other proceeds restricted for capital purposes... 20,665 - - 263,924 5,000 - 699 15,054 305,342 499,079 - - Transfers in...... - - - 61,867 - - 24,132 - 85,999 26,752 - - Transfers out...... ------Bond sale proceeds and loans received...... 841 - 4,100 97 - 360,706 - - 365,744 852,455 - - Proceeds from sale/transfer of capital assets...... - 9 1 653 - 23 2 - 688 8,186 - - Proceeds from commercial paper borrowings...... 304,100 50,000 - - 24,811 35,000 - - 413,911 143,761 - - Proceeds from passenger facility charges...... 98,432 ------98,432 92,702 - - Acquisition of capital assets...... (304,421) (294,033) (49,583) (501,012) (78,260) (167,656) (6,801) (779) (1,402,545) (1,307,990) (4,211) (2,745) Retirement of capital leases, bonds and loans...... (209,910) (31,894) (4,245) (7,361) (2,236) (105,696) (2,478) (5,879) (369,699) (733,150) (18,795) (26,440) Bond issue costs paid...... - - (130) - - (1,666) - - (1,796) (3,075) - (15) Interest paid on debt...... (225,073) (219,279) (3,313) (7,700) (1,408) (34,362) (4,789) (6,880) (502,804) (488,834) (4,698) (5,171) Federal interest income subsidy from Build America Bonds...... - 24,240 664 - - 3,991 - - 28,895 28,794 - - Other capital financing sources...... - - - 16,881 - - 554 15 17,450 - - - Other capital financing uses...... ------(869) (82) (951) (2,921) - - Net cash provided by (used in) capital and related financing activities...... (315,366) (470,957) (52,506) (172,651) (52,093) 90,340 10,450 1,449 (961,334) (884,241) (27,704) (34,371) Cash flows from investing activities: Purchases of investments with trustees...... (624,603) (199,584) (19,242) - - (185,525) - - (1,028,954) (1,269,820) - - Proceeds from sale of investments with trustees...... 635,126 281,532 16,665 - - 192,072 - 285 1,125,680 1,279,186 4,672 - Interest and investment income...... 4,808 4,230 1,328 5,297 1,882 1,173 830 12,836 32,384 25,744 137 154 Other investing activities...... ------(5) 65 Net cash provided by (used in) investing activities...... 15,331 86,178 (1,249) 5,297 1,882 7,720 830 13,121 129,110 35,110 4,804 219 Net increase (decrease) in cash and cash equivalents...... 63,909 (147,431) (10,332) (25,750) (12,904) 188,316 39,370 (26,000) 69,178 212,835 (5,534) (12,155) Cash and cash equivalents-beginning of year...... 809,832 787,560 247,796 932,305 360,979 218,965 143,853 52,151 3,553,441 3,340,606 66,147 78,302 Cash and cash equivalents-end of year...... $ 873,741 $ 640,129 $ 237,464 $ 906,555 $ 348,075 $ 407,281 $ 183,223 $ 26,151 $ 3,622,619 $ 3,553,441 $ 60,613 $ 66,147

The notes to the financial statements are an integral part of this statement. 36 CITY AND COUNTY OF SAN FRANCISCO Statement of Cash Flows – Proprietary Funds (Continued) Year Ended June 30, 2016 (With comparative financial information as of June 30, 2015) (In Thousands)

Business-Type Activities - Enterprise Funds Major Funds San San Hetch General San Governmental Francisco Francisco Hetchy Municipal Hospital Francisco Port of Laguna Activities - Internal International Water Water and Transportation Medical Wastewater San Honda Total Service Funds Airport Enterprise Power Age ncy Center Enterprise Francisco Hospital 2016 2015 2016 2015 Reconciliation of operating income (loss) to net cash provided by (used in) operating activities: Operating income (loss)...... $ 226,518 $ 104,730 $ 16,241 $ (604,938) $ (89,641) $ 40,222 $ 12,940 $ (30,574) $ (324,502) $ (215,681) $ 1,194 $ 4,081 Adjustments for non-cash and other activities: Depreciation and amortization...... 228,359 106,666 16,513 133,715 17,263 50,799 22,120 15,356 590,791 552,101 2,798 2,451 Provision for uncollectibles...... 581 179 - (114) - (63) (28) - 555 27 - - Write-off of capital assets...... - 423 4,908 (6,089) - 5,549 - - 4,791 9,388 - - Other...... 980 ------980 2,049 397 1,003 Changes in assets and deferred outflows of resources/liabilities and deferred inflows of resources: Receivables, net...... (9,535) (9,133) (5,412) 299 (103,955) (819) (823) (7,267) (136,645) 31,474 18,888 26,270 Due from other funds...... - (68) 961 - (28) 18 - 18,208 19,091 (47,723) - - Inventories...... 4 378 (92) (6,594) (1,704) 381 (133) (50) (7,810) (11,690) - - Other assets...... (1,188) - (211) (266) - - (22) - (1,687) 4,048 - - Accounts payable...... (1,546) (826) 197 (4,080) (1,879) 1,052 (568) (499) (8,149) 29,253 (843) (823) Accrued payroll...... 2,209 935 511 4,506 3,600 840 181 1,195 13,977 (58,247) 506 (1,379) Accrued vacation and sick leave pay...... 746 (309) 263 2,124 1,261 187 (28) (292) 3,952 2,969 208 116 Accrued workers' compensation...... 576 (448) 335 14,656 1,879 138 (55) 632 17,713 10,761 (79) 176 Other postemployment benefits obligation...... 9,055 7,283 2,324 15,695 18,455 4,073 1,553 5,544 63,982 80,174 1,651 2,078 Estimated claims payable...... - (2,810) (1,474) 13,742 - 3,166 (431) - 12,193 13,577 - - Due to other funds...... - 707 - (274) - (168) - - 265 206 (52) (9) Unearned revenue and other liabilities...... 11,852 13,014 2,918 (3,164) 69,315 2,356 (3,007) (70,654) 22,630 181,077 (2,889) (6,841) Net pension liability and pension related deferred outflows and inflows of resources...... (26,262) (19,785) (4,826) (56,038) (39,840) (8,820) (3,887) (16,673) (176,131) (208,080) (4,344) (5,134) Total adjustments...... 215,831 96,206 16,915 108,118 (35,633) 58,689 14,872 (54,500) 420,498 591,364 16,241 17,908 Net cash provided by (used in) operating activities...... $ 442,349 $ 200,936 $ 33,156 $ (496,820) $ (125,274) $ 98,911 $ 27,812 $ (85,074) $ 95,996 $ 375,683 $ 17,435 $ 21,989 Reconciliation of cash and cash equivalents to the statement of net position: Deposits and investments with City Treasury: Unrestricted...... $ 410,358 $ 323,916 $ 194,706 $ 811,548 $ 339,508 $ 159,118 $ 131,012 $ - $ 2,370,166 $ 2,440,334 $ 35,264 $ 37,905 Restricted...... 456,482 123,328 39,849 66,645 - 208,336 41,955 10,812 947,407 919,474 - - Deposits and investments outside City Treasury: Unrestricted...... 5,937 136 10 10,271 10 123 5 2 16,494 16,355 - - Restricted...... 445,122 192,814 5,510 18,091 8,557 39,757 10,555 15,338 735,744 736,521 25,349 32,907 Total deposits and investments...... 1,317,899 640,194 240,075 906,555 348,075 407,334 183,527 26,152 4,069,811 4,112,684 60,613 70,812 Less: Investments outside City Treasury not meeting the definition of cash equivalents...... (444,158) (65) (2,611) - - (53) (304) (1) (447,192) (559,243) - (4,665) Cash and cash equivalents at end of year on statement of cash flows...... $ 873,741 $ 640,129 $ 237,464 $ 906,555 $ 348,075 $ 407,281 $ 183,223 $ 26,151 $ 3,622,619 $ 3,553,441 $ 60,613 $ 66,147 Non-cash capital and related financing activities: Acquisition of capital assets on accounts payable and capital lease...... $ 83,187 $ 47,587 $ 2,838 $ - $ 3,690 $ 31,166 $ 1,354 $ 466 $ 170,288 $ 133,772 $ 361 $ 424 Tenant improvements financed by rent credits...... ------241 - 241 400 - - Net capitalized interest...... 7,700 65,076 67 2,130 - 13,220 32 - 88,225 100,043 - - Donated inventory...... - - - - 2,844 - - - 2,844 7,306 - - Capital contributions and other noncash capital items...... ------624 - 624 (4,328) - - Bond refunding...... 282,453 ------282,453 249,527 - - Interfund loan...... - 786 - - - 1,271 - - 2,057 1,621 - -

The notes to the financial statements are an integral part of this statement. 37 CITY AND COUNTY OF SAN FRANCISCO Statement of Fiduciary Net Position Fiduciary Funds June 30, 2016 (In Thousands)

Pension, Other Employee and Other Post- Employment Private- Benefit Trust Investment Purpose Trust Funds Trust Fund Fund Agency Funds ASSETS Deposits and investments with City Treasury...... $ 97,306 $ 746,983 $ 289,884 $ 138,794 Deposits and investments outside City Treasury: Cash and deposits...... 43,521 105 4,571 817 Short-term investments...... 1,009,676 - 138,600 - Debt securities...... 4,747,116 - - - Equity securities...... 9,351,864 - - - Real assets...... 2,341,500 - - - Private equity...... 2,753,869 - - - Foreign currency contracts, net...... 14,125 - - - Invested in securities lending collateral...... 865,681 - - - Receivables: Employer and employee contributions...... 32,424 - - 43,571 Brokers, general partners and others...... 66,689 - - - Federal and state grants and subventions...... - - 404 - Interest and other...... 44,254 850 10,081 276,318 Other assets...... - - 702 45,538 Capital assets: Land and other assets not being depreciated...... - - 56,589 - Facilities, infrastructure and equipment, net of depreciation...... - - 108,632 -

Total assets...... 21,368,025 747,938 609,463 505,038

DEFERRED OUTFLOWS OF RESOURCES Deferred outflows related to pensions...... - - 1,494 - Unamortized loss on refunding of debt...... - - 29,748 - Total deferred outflows of resources...... - - 31,242 -

LIABILITIES Accounts payable...... 26,958 4,043 21,801 53,652 Estimated claims payable...... 29,347 - - - Due to the primary government...... - - 2,611 - Agency obligations...... - - - 451,386 Bond interest payable...... - - 16,113 - Payable to brokers...... 107,444 - - - Deferred Retirement Option Program...... 613 - - - Payable to borrowers of securities...... 863,536 - - - Other liabilities...... 2,239 - 1,353 - Advance from primary government...... - - 14,602 - Long-term obligations...... - - 936,830 - Net pension liability...... - - 16,563 - Total liabilities...... 1,030,137 4,043 1,009,873 505,038

DEFERRED INFLOWS OF RESOURCES Deferred inflows related to pensions...... - - 7,874 -

NET POSITION Restricted for pension and other employee benefits...... 20,337,888 - - - Held for external pool participants...... - 743,895 - - Held for Redevelopment Agency dissolution...... - - (377,042) - Total net position...... $ 20,337,888 $ 743,895 $ (377,042) $ -

The notes to the financial statements are an integral part of this statement. 38 CITY AND COUNTY OF SAN FRANCISCO Statement of Changes in Fiduciary Net Position Fiduciary Funds Year Ended June 30, 2016 (In Thousands)

Pension, Other Employee and Other Post- Employment Private- Benefit Trust Investment Purpose Trust Funds Trust Fund Fund Additions: Redevelopment property tax revenues...... $ - $ - $ 119,302 Charges for services...... - - 83,559 Contributions: Employees' contributions...... 469,278 - - Employer contributions...... 1,385,104 - - Contributions to pooled investments...... - 3,183,781 - Total contributions...... 1,854,382 3,183,781 202,861 Investment income: Interest...... 190,793 3,772 1,632 Dividends...... 219,529 - - Net depreciation in fair value of investments...... (215,895) - - Securities lending income...... 7,562 - - Total investment income...... 201,989 3,772 1,632 Less investment expenses: Securities lending borrower rebates and expenses...... (1,315) - - Other investment expenses...... (47,174) - - Total investment expenses...... (48,489) - - Other additions...... - - 32,991 Total additions, net...... 2,007,882 3,187,553 237,484

Deductions: Neighborhood development...... - - 120,903 Depreciation...... - - 5,543 Interest on debt...... - - 52,204 Benefit payments...... 2,222,409 - - Refunds of contributions...... 12,886 - - Distribution from pooled investments...... - 2,983,674 - Administrative expenses...... 17,318 - 10,467 Total deductions...... 2,252,613 2,983,674 189,117

Change in net position...... (244,731) 203,879 48,367 Net position at beginning of year 20,582,619 540,016 (425,409) Net position at end of year...... $ 20,337,888 $ 743,895 $ (377,042)

The notes to the financial statements are an integral part of this statement. 39 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements June 30, 2016 (Dollars in Thousands)

(1) THE FINANCIAL REPORTING ENTITY

San Francisco is a city and county chartered by the State of California and as such can exercise the powers as both a city and a county under state law. As required by generally accepted accounting principles, the accompanying financial statements present the City and County of San Francisco (the City or primary government) and its component units. The component units discussed below are included in the City’s reporting entity because of the significance of their operations or financial relationships with the City.

As a government agency, the City is exempt from both federal income taxes and California State franchise taxes.

Blended Component Units Following is a description of those legally separate component units for which the City is financially accountable that are blended with the primary government because of their individual governance or financial relationships to the City.

San Francisco County Transportation Authority (Transportation Authority) – The voters of the City created the Transportation Authority in 1989 to impose voter-approved sales and use tax of one-half of one percent, for a period not to exceed 20 years, to fund essential traffic and transportation projects. In 2003, the voters approved Proposition K, extending the city-wide one-half of one percent sales tax with a new 30-year plan. A board consisting of the eleven members of the City’s Board of Supervisors serving ex officio governs the Transportation Authority. The Transportation Authority is reported in a special revenue fund in the City’s basic financial statements. Financial statements for the Transportation Authority can be obtained from their finance and administrative offices at 1455 Market Street, 22nd Floor, San Francisco, CA 94103.

San Francisco City and County Finance Corporation (Finance Corporation) – The Finance Corporation was created in 1990 by a vote of the electorate to allow the City to lease-purchase $20 million (plus 5% per year growth) of equipment using tax-exempt obligations. Although legally separate from the City, the Finance Corporation is reported as if it were part of the primary government because its sole purpose is to provide lease financing to the City. The Finance Corporation is governed by a three- member board of directors approved by the Mayor and the Board of Supervisors. The Finance Corporation is reported as an internal service fund. Financial statements for the Finance Corporation can be obtained from their administrative offices at City Hall, Room 336, 1 Dr. Carlton B. Goodlett Place, San Francisco, CA 94102.

San Francisco Parking Authority (The Parking Authority) – The Parking Authority was created in October 1949 to provide services exclusively to the City. In accordance with Proposition D authorized by the City’s electorate in November 1988, a City Charter amendment created the Parking and Traffic Commission (PTC). The PTC consists of five commissioners appointed by the Mayor. Upon creation of the PTC, the responsibility to oversee the City’s off-street parking operations was transferred from the Parking Authority to the PTC. The staff and fiscal operations of the Parking Authority were also incorporated into the PTC. Beginning on July 1, 2002, the responsibility for overseeing the operations of the PTC became the responsibility of the Municipal Transportation Agency (SFMTA) pursuant to Proposition E, which was passed by the voters in November 1999. Separate financial statements are not prepared for the Parking Authority. Further information about the Parking Authority can be obtained from the SFMTA Chief Financial Officer at 1 South Van Ness Avenue, 8th Floor, San Francisco, CA 94102.

40 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Discretely Presented Component Unit Treasure Island Development Authority (The TIDA) – The TIDA is a nonprofit public benefit corporation. The TIDA was authorized in accordance with the Treasure Island Conversion Act of 1997. Seven commissioners who are appointed by the Mayor, subject to confirmation by the City’s Board of Supervisors, govern the TIDA. The specific purpose of the TIDA is to promote the planning, redevelopment, reconstruction, rehabilitation, reuse, and conversion of the property known as Naval Station Treasure Island for the public interest, convenience, welfare, and common benefit of the inhabitants of the City. The TIDA has adopted as its mission the creation of affordable housing and economic development opportunities on Treasure Island.

The TIDA’s governing body is not substantively the same as that of the City and does not provide services entirely or almost entirely to the City. The TIDA is reported in a separate column to emphasize that it is legally separate from the City. The City is financially accountable for the TIDA through the appointment of the TIDA’s Board and the ability of the City to approve the TIDA’s budget. Disclosures related to the TIDA, where significant, are separately identified throughout these notes. Separate financial statements are not prepared for TIDA. Further information about TIDA can be obtained from their administrative offices at 1 Avenue of the Palms, Suite 241, Treasure Island, San Francisco, CA 94130.

Fiduciary Component Unit Successor Agency to the Redevelopment Agency of the City and County of San Francisco (Successor Agency) – The Successor Agency was created on February 1, 2012 to serve as a custodian for the assets and to wind down the affairs of the former San Francisco Redevelopment Agency pursuant to California Redevelopment Dissolution Law. The Successor Agency is governed by the Successor Agency Commission, commonly known as the Commission on Community Investment and Infrastructure, and is a separate public entity from the City. The Commission has five members, which serve at the pleasure of the City’s Mayor and are subject to confirmation by the Board of Supervisors. The City is financially accountable for the Successor Agency through the appointment of the Commission and a requirement that the Board of Supervisors approve the Successor Agency’s annual budget.

The financial statements present the Successor Agency and its component units, entities for which the Successor Agency is considered to be financially accountable. The City and County of San Francisco Redevelopment Financing Authority (Financing Authority) is a joint powers authority formed between the former Agency and the City to facilitate the long-term financing of the former Agency activities. The Financing Authority is included as a blended component unit in the Successor Agency’s financial statements because the Financing Authority provides services entirely to the Successor Agency.

Per the Redevelopment Dissolution Law, certain actions of the Successor Agency are also subject to the direction of an Oversight Board. The Oversight Board is comprised of seven-member representatives from local government bodies: four City representatives appointed by the Mayor of the City subject to confirmation by the Board of Supervisors of the City; the Vice Chancellor of the San Francisco Community College District; the Board member of the Bay Area Rapid Transit District; and the Executive Director of Policy and Operations of the San Francisco Unified School District.

In general, the Successor Agency’s assets can only be used to pay enforceable obligations in existence at the date of dissolution (including the completion of any unfinished projects that were subject to legally enforceable contractual commitments). In future fiscal years, the Successor Agency will only be allocated revenues in the amount that is necessary to pay the estimated annual installment payments on enforceable obligations of the former Agency until all enforceable obligations of the former Agency have been paid in full and all assets have been liquidated. Based upon the nature of the Successor Agency’s custodial role, the Successor Agency is reported in a fiduciary fund (private-purpose trust fund). Complete financial statements can be obtained from the Successor Agency’s finance department at 1 South Van Ness Avenue, 5th Floor, San Francisco, CA 94103.

41 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Non-Disclosed Organizations

There are other governmental agencies that provide services within the City. These entities have independent governing boards and the City is not financially accountable for them. The City’s basic financial statements, except for certain cash held by the City as an agent, do not reflect operations of the San Francisco Airport Improvement Corporation, San Francisco Health Authority, San Francisco Housing Authority, San Francisco Unified School District and San Francisco Community College District. The City is represented in two regional agencies, the Bay Area Rapid Transit District and the Bay Area Air Quality Management District, both of which are also excluded from the City’s reporting entity.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Government-wide and fund financial statements The government-wide financial statements (i.e., the statement of net position and the statement of activities) report information on all of the non-fiduciary activities of the primary government and its component units. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business-type activities, which rely, to a significant extent, on fees and charges for support. Likewise, the primary government is reported separately from certain legally separate component units for which the primary government is financially accountable.

The statement of activities demonstrates the degree to which the direct expenses of a given function or segment is offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment. Program revenues include (1) charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given function or segment, and (2) grants and contributions that are restricted to meeting the operational or capital requirements of a particular function or segment. Taxes and other items not properly included among program revenues are reported instead as general revenues.

Separate financial statements are provided for governmental funds, proprietary funds, and fiduciary funds, even though the latter are excluded from the government-wide financial statements. Major individual governmental funds and major individual enterprise funds are reported as separate columns in the fund financial statements.

The basic financial statements include certain prior year summarized comparative information. This information is presented only to facilitate financial analysis, and is not at the level of detail required for a presentation in accordance with generally accepted accounting principles. Accordingly, such information should be read in conjunction with the City's financial statements for the year ended June 30, 2015, from which the summarized information was derived.

(b) Measurement focus, basis of accounting, and financial statement presentation The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting, as are the proprietary fund and fiduciary fund financial statements. Agency funds, however, report only assets and liabilities and cannot be said to have a measurement focus. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements have been met.

Governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. The

42 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

City considers property tax revenues to be available if they are collected within 60 days of the end of the current fiscal period. All other revenues are considered to be available if they are generally collected within 60 days of the end of the current fiscal period. It is the City’s policy to submit reimbursement and claim requests for federal and state grant revenues within 30 days of the end of the program cycle and payment is generally received within the first or second quarter of the following fiscal year. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures, as well as expenditures related to vacation, sick leave, claims and judgments, are recorded only when payment is due.

Property taxes, other local taxes, grants and subventions, licenses, charges for services, rents and concessions, and interest associated with the current fiscal period are all considered susceptible to accrual and so have been recognized as revenues of the current fiscal period. All other revenue items are considered to be measurable and available only when the City receives cash.

During the year ended June 30, 2016, the City adopted a new revenue recognition policy, and changed the availability period from 90 days to 60 days. The new policy more closely reflects the use of current resources to pay liabilities of the current period. The adoption of the new accounting principle resulted in a reduction in revenues by approximately $23.7 million for the year ended June 30, 2016, and did not have a significant impact on the financial statements as of and for the year ended June 30, 2015.

The City reports the following major governmental fund: . The General Fund is the City’s primary operating fund. It accounts for all financial resources of the City except those required to be accounted for in another fund.

The City reports the following major proprietary (enterprise) funds: . The San Francisco International Airport Fund accounts for the activities of the City-owned commercial service airport in the San Francisco Bay Area. . The San Francisco Water Enterprise Fund accounts for the activities of the San Francisco Water Enterprise (Water Enterprise). The Water Enterprise is engaged in the distribution of water to the City and certain suburban areas. . The Hetch Hetchy Water and Power Enterprise Fund accounts for the activities of Hetch Hetchy Water and Power Department (Hetch Hetchy). The department is engaged in the collection and conveyance of approximately 85% of the City’s water supply and in the generation and transmission of electricity. . The Municipal Transportation Agency Fund accounts for the activities of the Municipal Transportation Agency (SFMTA). The SFMTA was established by Proposition E, passed by the City’s voters in November 1999. The SFMTA includes the San Francisco Municipal Railway (Muni) and the operations of Sustainable Streets, which includes the Parking Authority. Muni was established in 1912 and is responsible for the operations of the City’s public transportation system. Sustainable Streets is responsible for proposing and implementing street and traffic changes and oversees the City’s off-street parking operations. Sustainable Streets is a separate department of the SFMTA. The parking garages fund accounts for the activities of various non-profit corporations formed by the Parking Authority to provide financial and other assistance to the City to acquire land, construct facilities, and manage various parking facilities. . The General Hospital Medical Center Fund accounts for the activities of the San Francisco General Hospital (SFGH), a City-owned acute care hospital. . The San Francisco Wastewater Enterprise Fund was created after the San Francisco voters approved a proposition in 1976, authorizing the City to issue $240 million in bonds for the purpose of acquiring, construction, improving, and financing improvements to the City’s municipal sewage treatment and disposal system.

43 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

. The Port of San Francisco Fund accounts for the operation, development, and maintenance of seven and one-half miles of waterfront property of the Port of San Francisco (Port). This was established in 1969 after the San Francisco voters approved a proposition to accept the transfer of the Harbor of San Francisco from the State of California. . The Laguna Honda Hospital Fund accounts for the activities of Laguna Honda Hospital (LHH), the City-owned skilled nursing facility, which specializes in serving elderly and disabled residents.

Additionally, the City reports the following fund types: . The Debt Service Funds account for the accumulation of property taxes and other revenues for periodic payment of interest and principal on general obligation and certain lease revenue bonds and related authorized costs. . The Capital Projects Funds are used to account for financial resources that are restricted, committed or assigned to expenditures for the acquisition of land or acquisition and construction of major facilities other than those financed in the proprietary fund types. . The Special Revenue Funds are used to account for the proceeds of specific revenue sources that are restricted or committed to expenditures for specified purposes other than debt service or capital projects . The Permanent Fund accounts for resources that are legally restricted to the extent that only earnings, not principal, may be used for purposes that support specific programs. . The Internal Service Funds account for the financing of goods or services provided by one City department to another City department on a cost-reimbursement basis. Internal Service Funds account for the activities of the equipment maintenance services, centralized printing and mailing services, centralized telecommunications and information services, and lease financing through the Finance Corporation. . The Pension, Other Employee and Other Postemployment Benefit Trust Funds reflect the activities of the Employees’ Retirement System (Retirement System), the Health Service System and the Retiree Health Care Trust Fund. The Retirement System accounts for employee contributions, City contributions, and the earnings and profits from investments. It also accounts for the disbursements made for employee retirement benefits, withdrawals, disability and death benefits as well as administrative expenses. The Health Service System accounts for contributions from active and retired employees and surviving spouses, City contributions, and the earnings and profits from investments. It also accounts for the disbursements to various health plans and health care providers for the medical expenses of beneficiaries. The Retiree Health Care Trust Fund currently accounts for other postemployment benefit contributions from the City and the San Francisco Community College District, together with the earnings and profits from investments. No disbursements, other than to defray reasonable expenses of administering the trust, will be made until sufficient funds are set aside to pay for all future retiree health care costs, except in certain limited circumstances. . The Investment Trust Fund accounts for the external portion of the Treasurer’s Office investment pool. The funds of the San Francisco Community College District, San Francisco Unified School District, the Trial Courts of the State of California and the Transbay Joint Powers Authority are accounted for within the Investment Trust Fund. . The Private-Purpose Trust Fund accounts for the custodial responsibilities that are assigned to the Successor Agency with the passage of the Redevelopment Dissolution Act. . The Agency Funds account for the resources held by the City in a custodial capacity on behalf of: the State of California and other governmental agencies; employees for payroll deductions; and human welfare, community health, and transportation programs.

The City applies all applicable Governmental Accounting Standards Board (GASB) pronouncements.

44 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

In general, the effect of interfund activity has been eliminated from the government-wide financial statements. Exceptions to this rule are charges to other City departments from the General Fund, Water Enterprise and Hetch Hetchy. These charges have not been eliminated because elimination would distort the direct costs and program revenues reported in the statement of activities.

Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services in connection with the fund’s principal ongoing operations. The principal operating revenues of the City’s enterprise and internal service funds are charges for customer services including: water, sewer and power charges, public transportation fees, airline fees and charges, parking fees, hospital patient service fees, commercial and industrial rents, printing services, vehicle maintenance fees, and telecommunication and information system support charges. Operating expenses for enterprise funds and internal service funds include the cost of services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses.

When both restricted and unrestricted resources are available for use, it is the City’s policy to use restricted resources first, then unrestricted resources as they are needed.

The City adopts two-year rolling budgets annually for all governmental funds on a substantially modified accrual basis of accounting except for capital project funds and certificates of participation and other debt service funds, which substantially adopt project length budgets.

The budget of the City is a detailed operating plan, which identifies estimated costs and results in relation to estimated revenues. The budget includes (1) the programs, projects, services, and activities to be provided during the fiscal year, (2) the estimated resources (inflows) available for appropriation, and (3) the estimated charges to appropriations. The budget represents a process through which policy decisions are deliberated, implemented, and controlled. The City Charter prohibits expending funds for which there is no legal appropriation.

The Administrative Code Chapter 3 outlines the City’s general budgetary procedures, with Section 3.3 detailing the budget timeline. A summary of the key budgetary steps is summarized as follows:

Original Budget

(1) Departments and Commissions conduct hearings to obtain public comment on their proposed annual budgets beginning in December and submit their budget proposals to the Controller’s Office no later than February 21. (2) The Controller’s Office consolidates the budget estimates and transmits them to the Mayor’s Office no later than the first working day of March. Staff of the Mayor’s Office analyze, review and refine the budget estimates before transmitting the Mayor’s Proposed Budget to the Board of Supervisors. (3) By the first working day of May, the Mayor submits the Proposed Budget for selected departments to the Board of Supervisors. The selected departments are determined by the Controller in consultation with the Board President and the Mayor’s Budget Director. Criteria for selecting the departments include (1) that they are not supported by the City’s General Fund or (2) that they do not rely on the State’s budget submission in May for their revenue sources. (4) By the first working day of June, the Mayor submits the complete Proposed Budget to the Board of Supervisors along with a draft of the Annual Appropriation Ordinance prepared by the Controller’s Office. (5) Within five working days of the Mayor’s proposed budget transmission to the Board of Supervisors, the Controller reviews the estimated revenues and assumptions in the Mayor’s Proposed Budget and provides an opinion as to their accuracy and reasonableness. The Controller also may make

45 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

a recommendation regarding prudent reserves given the Mayor’s proposed resources and expenditures. (6) The designated Committee (usually the Budget Committee) of the Board of Supervisors conducts hearings, hears public comment, and reviews the Mayor’s Proposed Budget. The Committee recommends an interim budget reflecting the Mayor’s budget transmittal and, by June 30, the Board of Supervisors passes an interim appropriation and salary ordinances. (7) Not later than the last working day of July, the Board of Supervisors adopts the budget through passage of the Annual Appropriation Ordinance, the legal authority for enactment of the budget.

Final Budget The final budgetary data presented in the basic financial statements reflects the following changes to the original budget: (1) Certain annual appropriations are budgeted on a project or program basis. If such projects or programs are not completed at the end of the fiscal year, unexpended appropriations, including encumbered funds, are carried forward to the following year. In certain circumstances, other programs and regular annual appropriations may be carried forward after appropriate approval. Annually appropriated funds, not authorized to be carried forward, lapse at the end of the fiscal year. Appropriations carried forward from the prior year are included in the final budgetary data. (2) Appropriations may be adjusted during the year with the approval of the Mayor and the Board of Supervisors, e.g. supplemental appropriations. Additionally, the Controller is authorized to make certain transfers of surplus appropriations within a department. Such adjustments are reflected in the final budgetary data. The Annual Appropriation Ordinance adopts the budget at the character level of expenditure within departments. As described above, the Controller is authorized to make certain transfers of appropriations within departments. Accordingly, the legal level of budgetary control by the Board of Supervisors is the department level. Budgetary data, as revised, is presented in the basic financial statements for the General Fund. Final budgetary data excludes the amount reserved for encumbrances for appropriate comparison to actual expenditures.

(d) Deposits and Investments Investment in the Treasurer’s Pool The Treasurer invests on behalf of most funds of the City and external participants in accordance with the City’s investment policy and the California State Government Code. The City Treasurer who reports on a monthly basis to the Board of Supervisors manages the Treasurer’s pool. In addition, the function of the County Treasury Oversight Committee is to review and monitor the City’s investment policy and to monitor compliance with the investment policy and reporting provisions of the law through an annual audit.

The Treasurer’s investment pool consists of two components: 1) pooled deposits and investments and 2) dedicated investment funds. The dedicated investment funds represent restricted funds and relate to Successor Agency separately managed funds, bond issues of the Enterprise Funds, and the General Fund’s cash reserve requirement. In addition to the Treasurer’s investment pool, the City has other funds that are held by trustees. These funds are related to the issuance of bonds and certain loan programs of the City. The investments of the Retirement System and of the Retiree Health Care Trust Fund are held by trustees.

The San Francisco Unified School District (School District), San Francisco Community College District (Community College District), and the City are involuntary participants in the City’s investment pool. As of June 30, 2016, involuntary participants accounted for approximately 95.6% of the pool. Voluntary

46 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands) participants accounted for 4.4% of the pool. Further, the School District, Community College District, the Trial Courts of the State of California, and the Transbay Joint Powers Authority are external participants of the City’s pool. At June 30, 2016, $743.9 million was held on behalf of these external participants. The total percentage share of the City’s pool that relates to these four external participants is 9.4%. Internal participants accounted for 90.6% of the pool.

Investment Valuation Investments are carried at fair value, except for certain non-negotiable investments that are reported at cost because they are not transferable and have terms that are not affected by changes in market interest rates, such as collateralized certificates of deposit and public time deposits. The fair value of investments is determined monthly and is based on current market prices. The fair value of participants’ position in the pool approximates the value of the pool shares. The method used to determine the value of participants’ equity is based on the book value of the participants’ percentage participation. In the event that a certain fund overdraws its share of pooled cash, the overdraft is covered by the General Fund and a payable to the General Fund is established in the City’s basic financial statements.

Retirement System – Investments are reported at fair value. Securities traded on national or international exchanges are valued at the last reported sales price at current exchange rates. Securities that do not have an established market are reported at estimated fair value derived from third-party pricing services. Purchases and sales of investments are recorded on a trade date basis.

The fair values of real estate investments are based on net asset values provided by the investment managers. Private equity investments represent interest in limited partnerships. The fair values of private equity investments are also based on net asset values provided by the general partners. For investments that are not traded on national or international exchanges with closing market prices available data is obtained to corroborate pricing.

The Charter and Retirement Board policies permit the Retirement System to use investments to enter into securities lending transactions – loans of securities to broker-dealers and other entities for collateral with a simultaneous agreement to return the collateral for the same securities in the future. The collateral may consist of cash or non-cash; non-cash collateral is generally U.S. Treasuries or other U.S. government obligations. The Retirement System’s securities custodian is the agent in lending the domestic securities for collateral of 102% and international securities for collateral of 105%. Contracts with the lending agent require them to indemnify the Retirement System if the borrowers fail to return the securities (and if the collateral were inadequate to replace the securities lent) or fail to pay the Retirement System for income distributions by the securities’ issuers while the securities are on loan. Non-cash collateral cannot be pledged or sold unless the borrower defaults, and therefore, is not reported in the Retirement System’s financial statements.

All securities loans can be terminated on demand by either the Retirement System or the borrower, although the average term of the loans as of June 30, 2016 was 78 days. All cash collateral received was invested in a separately managed account by the lending agent using investment guidelines developed and approved by the Retirement System. As of June 30, 2016, the weighted average maturity of the reinvested cash collateral account was 25 days. The term to maturity of the loaned securities is generally not matched with the term to maturity of the investment of the said collateral. Cash collateral may also be invested separately in term loans, in which case the maturity of the loaned securities matches the term of the loan.

Cash collateral invested in the separate account managed by the lending agent is reported at fair value. Payable to borrowers of securities in the statement of fiduciary net position represents the cash collateral received from borrowers. Additionally, the income and costs of securities lending transactions, such as borrower rebates and fees, are recorded respectively as revenues and expenses in the statement of changes in fiduciary net position.

47 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

San Francisco International Airport – The Airport has entered into certain derivative instruments, which it values at fair value, in accordance with GASB Statement No. 53 – Accounting and Financial Reporting for Derivative Instruments and GASB Statement No. 72 – Fair Value Measurement and Application. The Airport applies hedge accounting for changes in the fair value of hedging derivative instruments, in accordance with GASB Statement No. 64 – Derivative Instruments: Application of Hedge Accounting Termination Provisions, an amendment of GASB Statement No. 53. Under hedge accounting, if the derivatives are determined to be effective hedges, the changes in the fair value of hedging derivative instruments are reported as either deferred inflows or deferred outflows in the statement of net position, otherwise changes in fair value are recorded within the investment revenue classification.

Other funds – Non-pooled investments are also generally carried at fair value. However, money market investments (such as short-term, highly liquid debt instruments including commercial paper, bankers’ acceptances, and U.S. Treasury and agency obligations) that have a remaining maturity at the time of purchase of one year or less and participating interest-earning investment contracts (such as negotiable certificates of deposit, repurchase agreements and guaranteed or bank investment contracts) are carried at amortized cost, which approximates fair value. The fair value of non-pooled investments is determined annually and is based on current market prices. The fair value of investments in open-end mutual funds is determined based on the fund’s current share price.

Investment Income Income from pooled investments is allocated at month-end to the individual funds or external participants based on the fund or participant’s average daily cash balance in relation to total pooled investments. City management has determined that the investment income related to certain funds should be allocated to the General Fund. On a budget basis, the interest income is recorded in the General Fund. On a generally accepted accounting principles (GAAP) basis, the income is reported in the fund where the related investments reside. A transfer is then recorded to transfer an amount equal to the interest earnings to the General Fund. This is the case for certain other governmental funds, Internal Service, Investment Trust and Agency Funds.

It is the City’s policy to charge interest at month-end to those funds that have a negative average daily cash balance. In certain instances, City management has determined that the interest expense related to the fund should be allocated to the General Fund. On a budget basis, the interest expense is recorded in the General Fund. On a GAAP basis, the interest expense is recorded in the fund and then a transfer from the General Fund for an amount equal to the interest expense is made to the fund. This is the case for certain other funds, SFMTA, LHH, SFGH, and the Internal Service Funds.

Income from non-pooled investments is recorded based on the specific investments held by the fund. The interest income is recorded in the fund that earned the interest.

(e) Loans Receivable The Mayor’s Office of Housing (MOH) and the Mayor’s Office of Community Development (MOCD) administer several housing and small business subsidy programs and issue loans to qualified applicants. In addition, the Department of Building Inspection manages other receivables from organizations. Management has determined through policy that many of these loans may be forgiven or renegotiated and extended long into the future if certain terms and conditions of the loans are met. At June 30, 2016, it was determined that $1,122.0 million of the $1,203.8 million loan portfolio is not expected to be ultimately collected.

For the purposes of the fund financial statements, the governmental funds expenditures relating to long- term loans arising from loan subsidy programs are charged to operations upon funding and the loans are recorded, net of an estimated allowance for potentially uncollectible loans, with an offset to a deferred inflow of resources. For purposes of the government-wide financial statements, long-term loans are not offset by deferred inflows of resources.

48 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

(f) Inventories Inventories recorded in the proprietary funds primarily consist of construction materials and maintenance supplies, as well as pharmaceutical supplies maintained by the hospitals. Generally, proprietary funds value inventory at cost or average cost and expense supply inventory as it is consumed. This is referred to as the consumption method of inventory accounting. The governmental fund types use the purchase method to account for supply inventories, which are not material. This method records items as expenditures when they are acquired.

(g) Property Held for Resale Property held for resale includes both residential and commercial property and is recorded as other assets at the lower of estimated cost or estimated conveyance value. Estimated conveyance value is management’s estimate of net realizable value of each property parcel based on its current intended use. Property held for sale may, during the period it is held by the City, generate rental income, which is recognized as it becomes due and is considered collectible.

(h) Capital Assets Capital assets, which include land, facilities and improvements, machinery and equipment, infrastructure assets, and intangible assets, are reported in the applicable governmental or business- type activities columns in the government-wide financial statements and in the proprietary and private- purpose trust funds. Capital assets, except for intangible assets, are defined as assets with an initial individual cost of more than $5 thousand and have an estimated life that extends beyond a single reporting period or more than a year. Intangible assets have a capitalization threshold of $100 thousand. Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at estimated fair value at the date of donation. Capital outlay is recorded as expenditures of the General Fund and other governmental funds and as assets in the government-wide financial statements to the extent the City’s capitalization threshold is met. Interest incurred during the construction phase of the capital assets of business-type activities is reflected in the capitalized value of the asset constructed, net of interest earned on the invested proceeds of tax-exempt debt over the same period. Amortization of assets acquired under capital leases is included in depreciation and amortization. Facilities and improvements, infrastructure, machinery and equipment, easements, and intangible assets of the primary government, as well as the component units, are depreciated using the straight-line method over the following estimated useful lives:

Assets Years Facilities and improvements 15 to 175 Infrastructure 15 to 70 Machinery and equipment 2 to 75 Intangible assets Varies with type

Works of art, historical treasures and zoological animals held for public exhibition, education, or research in furtherance of public service, rather than financial gain, are not capitalized. These items are protected, kept unencumbered, cared for, and preserved by the City. It is the City’s policy to utilize proceeds from the sale of these items for the acquisition of other items for collection and display.

(i) Accrued Vacation and Sick Leave Pay Vacation pay, which may be accumulated up to ten weeks depending on an employee’s length of service, is payable upon termination. Sick leave may be accumulated up to six months. Unused amounts accumulated prior to December 6, 1978 are vested and payable upon termination of employment by retirement or disability caused by industrial accident or death.

49 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

The City accrues for all salary-related items in the government-wide and proprietary fund financial statements for which they are liable to make a payment directly and incrementally associated with payments made for compensated absences on termination. The City includes its share of social security and Medicare payments made on behalf of the employees in the accrual for vacation and sick leave pay.

(j) Bond Issuance Costs, Premiums, Discounts, and Interest Accretion In the government-wide financial statements, the proprietary fund type and fiduciary fund type financial statements, long-term debt and other long-term obligations are reported as liabilities in the applicable governmental activities, business-type activities, proprietary fund or fiduciary fund statement of net position. Bond issuance costs related to prepaid insurance costs, bond premiums and discounts for San Francisco International Airport, San Francisco Water Enterprise, Hetch Hetchy Water and Power, SFMTA, and San Francisco Wastewater Enterprise are amortized over the life of the bonds using the effective interest method. The remaining bond prepaid insurance costs, bond premiums and discounts are calculated using the straight-line method. Bonds payable are reported net of the applicable bond premium or discount.

In the fund financial statements, governmental funds recognize bond premiums and discounts as other financing sources and uses, respectively. Issuance costs including bond insurance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures.

Interest accreted on capital appreciation bonds is reported as accrued interest payable in the government-wide, proprietary fund and fiduciary fund financial statements.

(k) Fund Equity Governmental Fund Balance

As prescribed by Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, governmental funds report fund balance in one of five classifications that comprise a hierarchy based primarily on the extent to which the City is bound to honor constraints on the specific purposes for which amounts in the funds can be spent. The five fund balance classifications are as follows: . Nonspendable – includes amounts that cannot be spent because they are either not in spendable form or legally or contractually required to be maintained intact. The not in spendable form criterion includes items that are not expected to be converted to cash, such as prepaid amounts, as well as certain long-term receivables that would otherwise be classified as unassigned. . Restricted – includes amounts that can only be used for specific purposes due to constraints imposed by external resource providers, by the City’s Charter, or by enabling legislation. Restrictions may effectively be changed or lifted only with the consent of resource providers. . Committed – includes amounts that can only be used for specific purposes pursuant to an ordinance passed by the Board of Supervisors and signed by the Mayor. Commitments may be changed or lifted only by the City taking the same formal action that imposed the constraint originally. . Assigned – includes amounts that are not classified as nonspendable, restricted, or committed, but are intended to be used by the City for specific purposes. Intent is expressed by legislation or by action of the Board of Supervisors or the City Controller to which legislation has delegated the authority to assign amounts to be used for specific purposes. . Unassigned – is the residual classification for the General Fund and includes all amounts not contained in the other classifications. Unassigned amounts are technically available for any purpose. Other governmental funds may only report a negative unassigned balance that was created after classification in one of the other four fund balance categories.

50 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

In circumstances when an expenditure is made for a purpose for which amounts are available in multiple fund balance classifications, fund balance is generally depleted in the order of restricted, committed, assigned, and unassigned.

Encumbrances The City establishes encumbrances to record the amount of purchase orders, contracts, and other obligations, which have not yet been fulfilled, cancelled, or discharged. Encumbrances outstanding at year-end are recorded as part of restricted or assigned fund balance.

Net Position The government-wide and proprietary fund financial statements utilize a net position presentation. Net position is categorized as net investment in capital assets, restricted, and unrestricted.

. Net Investment In Capital Assets – This category groups all capital assets, including infrastructure, into one component of net position. Accumulated depreciation and the outstanding balances of debt, including debt related deferred outflows and inflows of resources, that are attributable to the acquisition, construction, or improvement of these assets reduce the balance in this category.

. Restricted Net Position – This category represents net position that has external restrictions imposed by creditors, grantors, contributors or laws or regulations of other governments and restrictions imposed by law through constitutional provisions or enabling legislation.

. Unrestricted Net Position – This category represents net position of the City, not restricted for any project or other purpose.

(l) Interfund Transfers Interfund transfers are generally recorded as transfers in (out) except for certain types of transactions that are described below.

. Charges for services are recorded as revenues of the performing fund and expenditures of the requesting fund. Unbilled costs are recognized as an asset of the performing fund and a liability of the requesting fund at the end of the fiscal year. . Reimbursements for expenditures, initially made by one fund, which are properly applicable to another fund, are recorded as expenditures in the reimbursing fund and as a reduction of expenditures in the fund that is reimbursed.

(m) Refunding of Debt In governmental and business-type activities and proprietary and fiduciary funds, losses or gains from advance refundings are recorded as deferred outflows of resources and deferred inflows of resources, respectively, and amortized into expense.

(n) Pollution Remediation Obligations Pollution remediation obligations are measured at their current value using a cost-accumulation approach, based on the pollution remediation outlays expected to be incurred to settle those obligations. Each obligation or obligating event is measured as the sum of probability-weighted amounts in a range of possible estimated amounts. Some estimates of ranges of possible cash flows may be limited to a few discrete scenarios or a single scenario, such as the amount specified in a contract for pollution remediation services.

51 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

(o) Cash Flows Statements of cash flows are presented for proprietary fund types. Cash and cash equivalents include all unrestricted and restricted highly liquid investments with original purchase maturities of three months or less. Pooled cash and investments in the City’s Treasury represent monies in a cash management pool and such accounts are similar in nature to demand deposits.

(p) Pensions For purposes of measuring the net pension liability and deferred outflows/inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the SFERS and the California Public Employees’ Retirement System (“CalPERS”) plans and additions to/deductions from the plans’ fiduciary net positions have been determined on the same basis as they are reported by the plans. For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms. Plan member contributions are recognized in the period in which the contributions are due. Investments are reported at fair value.

GASB Statement No. 68, Accounting and Financial Reporting for Pensions - an amendment of GASB Statement No. 27 (GASB Statement No. 68) requires that the reported results pertain to liability and asset information within certain defined timeframes. Liabilities are based on the results of actuarial calculations performed as of June 30, 2014 and were rolled forward to June 30, 2015. For this report, the following timeframes are used for the City’s pension plans:

Valuation Date (VD)………… June 30, 2014 updated to June 30, 2015 Measurement Date (MD)…… June 30, 2015 Measurement Period (MP)… July 1, 2014 to June 30, 2015

(q) Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

(r) Reclassifications Certain amounts, presented as 2014-15 Summarized Comparative Financial Information in the basic financial statements, have been reclassified for comparative purposes, to conform to the presentation in the 2015-16 basic financial statements.

(s) Effects of New Pronouncements During fiscal year 2016, the City implemented the following accounting standards:

In February 2015, the GASB issued Statement No. 72, Fair Value Measurement and Application. Statement No. 72 requires the City to use valuation techniques which are appropriate under the circumstances and are consistent with the market approach, the cost approach or the income approach. Statement No. 72 establishes a hierarchy of inputs used to measure fair value consisting of three levels. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs. Statement No. 72 also contains note disclosure requirements regarding the hierarchy of valuation inputs and valuation techniques that was used for the fair value measurements. Implementation of this statement did not have a significant impact on the City for the year ended June 30, 2016, however, the San Francisco International Airport restated its beginning deferred outflows on derivative instruments and derivative instruments liabilities of fiscal year 2015 by $1.4 million. This restatement did not affect the City’s beginning net position.

52 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

In June 2015, the GASB issued Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not Within the Scope of GASB Statement 68 and Amendments to Certain Provisions of GASB Statements 67 and 68. This statement establishes requirements for defined benefit pensions that are not within the scope of Statement No. 68, as well as for the assets accumulated for purposes of providing those pensions. In addition, it establishes requirements for defined contribution pensions that are not within the scope of Statement No. 68. It also amends certain provisions of Statement No. 67, Financial Reporting for Pension Plans, and Statement No. 68 for pension plans and pensions that are within their respective scopes. The provisions in this statement are effective for the City’s fiscal year ending June 30, 2016, except those provisions that address employers and governmental nonemployer contributing entities for pensions that are not within the scope of Statement No. 68, which are effective for the City’s fiscal year ending June 30, 2017. Partial implementation of this statement did not have a significant impact on the City for the year ended June 30, 2016.

In June 2015, the GASB issued Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments. GASB Statement No. 76 establishes the hierarchy of GAAP for state and local governments. The new standard is effective for periods beginning after June 15, 2015. Implementation of this statement did not have a significant impact on the City for the year ended June 30, 2016.

In December 2015, the GASB issued Statement No. 79, Certain External Investment Pools and Pool Participants. GASB Statement No. 79 establishes accounting and financial reporting standards for qualifying external investment pools that elect to measure all their investments at amortized cost. The new standard is effective for periods beginning after June 15, 2015, except for certain provisions that will be effective for reporting periods beginning after December 15, 2015. Implementation of this statement did not have a significant impact on the City for the year ended June 30, 2016.

In March 2016, the GASB issued Statement No. 82, Pension Issues—an amendment of GASB Statements No. 67, No. 68, and No. 73. GASB Statement No. 82 addresses issues regarding (1) the presentation of payroll-related measures in required supplementary information, (2) the selection of assumptions and the treatment of deviations from the guidance in an Actuarial Standard of Practice for financial reporting purposes, and (3) the classification of payments made by employers to satisfy employee (plan member) contribution requirements. As Statement No. 82 changes the classification of these payments, commonly referred to as Employer-Paid Member Contributions, the City reclassified these payments. While the applicable requirements of this Statement are effective for reporting periods beginning after June 15, 2016, the City has elected early implementation for the year ended June 30, 2016. During the year ended June 30, 2015, the SFMTA made Employer-Paid Member Contributions to satisfy contribution requirements of the Retirement System and collective bargaining agreements. Statement No. 82 requires Employer-Paid Member contributions to be classified as employee contributions rather than classified as employer contributions. In fiscal year 2014-15, such payments were treated as employer contributions by the SFMTA as required by Statement No. 68. Therefore, early implementation of Statement No. 82, which amends Statement No. 68, resulted in a restatement which decreased beginning net position for fiscal year 2015-16 by $8.6 million.

In addition, the City is currently analyzing its accounting practices to determine the potential impact of the following pronouncements:

In June 2015, the GASB issued Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans and Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions. Statement No. 74 revises and establishes new accounting and financial reporting requirements for postemployment benefit plans other than pensions (OPEB). Statement No. 75 revises and establishes new accounting and financial reporting requirements for governments that provide their employees with OPEB and requires additional OPEB disclosures. Statement No. 74 is effective for periods beginning after June 15, 2016 and is effective for the City’s fiscal year ending June 30, 2017. Statement No. 75 is effective for periods beginning after June 15, 2017 and is effective for the City’s fiscal year ending June 30, 2018.

53 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

In August 2015, the GASB issued Statement No. 77, Tax Abatement Disclosures. Statement No. 77 establishes financial reporting standards for tax abatement agreements entered into by state and local governments. The new standard is effective for periods beginning after December 15, 2015. Application of this statement is effective for the City’s fiscal year ending June 30, 2017.

In December 2015, the GASB issued Statement No. 78, Pensions Provided through Certain Multiple- Employer Defined Benefit Pension Plans. GASB Statement No. 78 establishes accounting and financial reporting standards for defined benefit pensions provided by state or local governments through a cost- sharing plan that meets the criteria of Statement No. 68 and is not a state or local governmental pension plan. The new standard is effective for periods beginning after December 15, 2015. Application of this statement is effective for the City’s fiscal year ending June 30, 2017.

In March 2016, the GASB issued Statement No. 81, Irrevocable Split-Interest Agreements. GASB Statement No. 81 establishes accounting and financial reporting standards for irrevocable split-interest agreements created through trusts in which a donor irrevocably transfers resources to an intermediary. The new standard is effective for periods beginning after December 15, 2016. Application of this statement is effective for the City’s fiscal year ending June 30, 2018.

(t) Restricted Assets

Certain proceeds of the City’s governmental activities, enterprise and internal service funds bonds, as well as certain resources set aside for their repayment, are classified as restricted assets on the statement of net position because the use of the proceeds is limited by applicable bond covenants and resolutions. Restricted assets account for the principal and interest amounts accumulated to pay debt service, unspent bond proceeds, and amounts restricted for future capital projects.

(u) Deferred Outflows and Inflows of Resources The City records deferred outflows or inflows of resources in its governmental, proprietary, fiduciary, and government-wide financial statements for consumption or acquisition of net position that is applicable to a future reporting period. These financial statement elements are distinct from assets and liabilities.

In governmental fund statements, deferred inflows of resources consist of revenues not collected within the availability period after fiscal year-end. In government-wide financial statements, deferred outflows and inflows of resources are recorded for unamortized losses and gains on refunding of debt, deferred outflows and inflows of resources related to pensions, deferred outflows of resources on derivative instruments, and deferred inflows of resources related to the SFMTA’s leaseback transaction.

54 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

(3) RECONCILIATION OF GOVERNMENT-WIDE AND FUND FINANCIAL STATEMENTS

(a) Explanation of certain differences between the governmental funds balance sheet and the government-wide statement of net position

Total fund balances of the City’s governmental funds, $2,835,474, differs from net position of governmental activities, $2,009,063, reported in the statement of net position. The difference primarily results from the long-term economic focus in the statement of net position versus the current financial resources focus in the governmental funds balance sheets.

Total Long-term Internal Re cla ssi - Statement of Governmental Asse ts, Service fications and Net Position Funds Liabilities (1) Funds (2) Eliminations Totals Assets Deposits and investments with City Treasury...... $ 3,279,724 $ - $ 35,264 $ - $ 3,314,988 Deposits and investments outside City Treasury...... 84,845 - 25,349 - 110,194 Receivables, net Property taxes and penalties...... 77,241 - - - 77,241 Other local taxes...... 278,763 - - - 278,763 Federal and state grants and subventions...... 303,316 - - - 303,316 Charges for services...... 99,919 - 53 - 99,972 Interest and other...... 15,822 - 633 - 16,455 Due from other funds...... 12,062 - - (12,062) - Due from component unit...... 2,437 - - - 2,437 Advance to component unit...... 17,496 - - - 17,496 Loans receivable, net...... 81,801 - - - 81,801 Capital assets, net...... - 5,114,367 10,985 - 5,125,352 Other assets...... 6,855 6 266 - 7,127 Total assets...... 4,260,281 5,114,373 72,550 (12,062) 9,435,142

Deferred outflows of resources Unamortized loss on refunding of debt...... - 17,282 1,091 - 18,373 Deferred outflows related to pensions...... - 378,712 7,475 - 386,187 Total deferred outflows of resources……………………... - 395,994 8,566 - 404,560

Liabilities Accounts payable...... 353,721 - 7,459 - 361,180 Accrued payroll...... 89,262 - 1,862 - 91,124 Accrued vacation and sick leave pay...... - 147,925 3,102 - 151,027 Accrued workers' compensation...... - 225,961 1,864 - 227,825 Other postemployment benefits obligation...... - 1,179,468 23,518 - 1,202,986 Estimated claims payable...... - 160,498 - - 160,498 Accrued interest payable...... - 11,893 1,315 - 13,208 Unearned grant and subvention revenues...... 24,250 - - - 24,250 Due to other funds...... 33,696 - 361 (12,062) 21,995 Unearned revenue and other liabilities...... 494,796 2,022 58 - 496,876 Bonds, loans, capital leases, and other payables...... 102,778 2,994,530 197,217 - 3,294,525 Net pension liability...... - 1,331,114 24,166 - 1,355,280 Total liabilities...... 1,098,503 6,053,411 260,922 (12,062) 7,400,774

Deferred inflows of resources Unavailable revenue...... 326,304 (326,304) - - - Unamortized gain on refunding of debt...... - 236 - - 236 Deferred inflows related to pensions...... - 421,800 7,829 - 429,629 Total deferred inflows of resources...... 326,304 95,732 7,829 - 429,865

Fund balances/ net position Total fund balances/ net position...... $ 2,835,474 $ (638,776) $ (187,635) $ -$ 2,009,063

55 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

(1) When capital assets (land, infrastructure, buildings, equipment, and intangible assets) that are to be used in governmental activities are purchased or constructed, the costs of those assets are reported as expenditures in governmental funds. However, the statement of net position includes those capital assets, net of accumulated depreciation, among the assets of the City as a whole.

Cost of capital assets ...... $ 6,682,703 Accumulated depreciation ...... (1,568,336) $ 5,114,367

Long-term liabilities applicable to the City’s governmental activities are not due and payable in the current period, and accordingly, are not reported as fund liabilities. All liabilities, both current and long-term, are reported in the statement of net position.

Accrued vacation and sick leave pay ...... $ (147,925) Accrued workers’ compensation...... (225,961) Other postemployment benefits obligation ...... (1,179,468) Estimated claims payable ...... (160,498) Unearned revenue and other liabilities ...... (2,022) Bonds, loans, capital leases, and other payables ...... (2,994,530) $(4,710,404)

Interest on long-term debt is not accrued in governmental funds, but rather is recognized as an expenditure when due. $ (11,893)

Deferred outflows (inflows) of resources related to debt refundings in governmental activities are not financial resources, and therefore, are not reported in the governmental funds.

Unamortized loss on refunding of debt ...... $ 17,282 Unamortized gain on refunding of debt ...... (236) $ 17,046

Net pension liability is not due and payable in the current period, and accordingly is not reported as a fund liability. Deferred outflows (inflows) of resources related to pensions are not financial resources, and therefore, are not reported in the governmental funds.

Net pension liability ...... $ (1,331,114) Deferred outflows of resources related to pensions ...... 378,712 Deferred inflows of resources related to pensions ...... (421,800) $ (1,374,202)

Because the focus of governmental funds is on the availability of resources, some assets will not be available to pay for current period expenditures and thus are not included in fund balance.

Revenue not collected within 60 days of the end of the current fiscal period ...... $ 326,304 Other postemployment benefits assets ...... 6 $ 326,310

56 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

(2) Internal service funds are used by management to charge the costs of certain activities, such as capital lease financing, equipment maintenance services, printing and mailing services, and telecommunications and information systems, to individual funds. The assets and liabilities of the internal service funds are included in governmental activities in the statement of net position.

Net position before adjustments ...... $ (15,442) Adjustments for internal balances with the San Francisco Finance Corporation: Capital lease receivables from other governmental and enterprise funds ...... (193,450) Other assets ...... 266 Unearned revenue and other liabilities ...... 20,991 $ (187,635)

In addition, intrafund receivables and payables among various internal service funds of $24 are eliminated.

57 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

(b) Explanation of certain differences between the governmental funds statement of revenues, expenditures, and changes in fund balances and the government-wide statement of activities

The net change in fund balances for governmental funds, $546,531, differs from the change in net position for governmental activities, $721,849, reported in the statement of activities. The differences arise primarily from the long-term economic focus in the statement of activities versus the current financial resources focus in the governmental funds. The effect of the differences is illustrated below.

Total Long-term Capital- Internal Long-term Statement of Governmental Revenues/ related Service Debt Activities Funds Expenses (3) Items (4) Funds (5) Transactions (6) Totals Revenues Property taxes...... $ 1,798,776 $ 10,141 $ - $ - $ - $ 1,808,917 Business taxes...... 660,926 - - - - 660,926 Sales and use tax...... 267,443 2,608 - - - 270,051 Hotel room tax...... 387,661 - - - - 387,661 Utility users tax...... 98,651 - - - - 98,651 Parking tax...... 86,012 - - - - 86,012 Real property transfer tax...... 269,090 - - - - 269,090 Other local taxes...... 44,780 - - - - 44,780 Licenses, permits and franchises...... 43,722 102 - - - 43,824 Fines, forfeitures, and penalties...... 36,169 4,046 - - - 40,215 Interest and investment income...... 23,931 - - 117 - 24,048 Rents and concessions...... 135,865 (21,537) - - - 114,328 Intergovernmental: Federal...... 416,823 16,154 - - - 432,977 State...... 776,866 2,372 - - - 779,238 Other...... 85,872 1,346 - - - 87,218 Charges for services...... 392,665 1,245 - - - 393,910 Other...... 264,722 (6,161) - 874 - 259,435 Total revenues...... 5,789,974 10,316 - 991 - 5,801,281 Expenditures/ Expenses Current: Public Protection...... 1,269,000 (53,957) 13,739 (6,233) - 1,222,549 Public works, transportation and commerce...... 416,152 (6,992) 10,685 (867) - 418,978 Human welfare and neighborhood development...... 1,252,588 (19,431) 529 (283) - 1,233,403 Community health...... 776,612 (18,481) (11,060) - - 747,071 Culture and recreation...... 364,909 (10,072) (29,295) (14,514) - 311,028 General administration and finance...... 277,729 (22,563) (9,923) 1 ,140 - 246,383 General City responsibilities...... 114,684 - - (1,194) - 113,490 Debt service: Principal retirement………………………………...... 252,456 - - - (252,456) - Interest and other fiscal charges……………………… 119,723 - - 4,589 (16,063) 108,249 Bond issuance costs…………………………………… 7,108 - - - - 7,108 Capital outlay...... 223,904 - (223,904) - - - Total expenditures...... 5,074,865 (131,496) (249,229) (17,362) (268,519) 4,408,259 Excess (deficiency) of revenues over (under) expenditures………………………………………. 715,109 141,812 249,229 18,353 268,519 1,393,022 Other financing sources (uses) / changes in net position Net transfers in (out)...... (671,063) - - (110) - (671,173) Issuance of bonds and loans: Face value of bonds issued...... 595,925 - - - (595,925) - Premium on issuance of bonds...... 32,845 - - - (32,845) - Payment to refunded bond escrow agent...... (131,935) - - - 131,935 - Other financing sources...... 5,650 - - (5,650) - - Total other financing sources (uses)...... (168,578) - - (5,760) (496,835) (671,173)

Net change for the year...... $ 546,531 $ 141,812 $ 249,229 $ 12,593 $ (228,316) $ 721,849

58 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

(3) Property taxes that were unavailable and are reported as deferred inflows of resources in the governmental funds are recognized as revenues in the statement of activities. $ 10,141

Other revenues that were unavailable and reported as deferred inflows of resources in the governmental funds are recognized as revenues in the statement of activities. 175 $ 10,316

Some expenses reported in the statement of activities do not require the use of current financial resources and therefore are not reported as expenditures in governmental funds. Certain long-term liabilities reported in the prior year statement of net position were paid during the current period resulting in expenditures in the governmental funds. This is the amount by which the increase in long-term liabilities exceeded expenditures in funds that do not require the use of current financial resources. $ (155,660)

Changes to net pension liability and pension related deferred outflows and inflows of resources do not provide financial resources and, therefore, are not reported as a reduction in expenditures in governmental funds. 282,088

Governmental funds report revenues and expenditures primarily pertaining to long- term loan activities, which are not reported in the statement of activities. These activities are reported at the government-wide level in the statement of net position. This is the net expenditures reported in the governmental funds. 5,068 $ 131,496

(4) When capital assets that are to be used in governmental activities are purchased or constructed, the resources expended for those assets are reported as expenditures in governmental funds. However, in the statement of activities, the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. As a result, fund balance decreases by the amount of financial resources expended, whereas net position decreases by the amount of depreciation expense charged for the year and the loss on disposal of capital assets. Capital expenditures ...... $ 413,493 Depreciation expenses ...... (134,468) Loss on disposal of capital assets ...... (263) Write off construction of progress ...... (29,533) Difference ...... $ 249,229

(5) Internal service funds are used by management to charge the costs of certain activities, such as capital lease financing, equipment maintenance, printing and mailing services, and telecommunications, to individual funds. The adjustments for internal service funds “close” those funds by charging additional amounts to participating governmental activities to completely cover the internal service funds’ costs for the year. $ 12,593

59 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

(6) Bond premiums are a source of funds in the governmental funds when the bonds are issued, but are capitalized in the statement of net position. This is the amount of premiums capitalized during the current period. $ (32,845)

Repayment of bond principal and the payment to escrow for refunding of debt are reported as expenditures and other financing uses in governmental funds and, thus, have the effect of reducing fund balance because current financial resources have been used. For the City as a whole however, the principal payments and payment to escrow for refunded debt reduce the liabilities in the statement of net position and do not result in expenses in the statement of activities. The City's bonded debt was reduced because principal payments were made to bond holders and payments were made to escrow for refunded debt.

Principal payments made ...... $ 252,456 Payments to escrow for refunded debt ...... 131,935 384,391

Bond and loan proceeds and capital leases are reported as other financing sources in governmental funds and thus contribute to the change in fund balance. In the government-wide statements, however, issuing debt increases long-term liabilities in the statement of net position and do not affect the statement of activities. Proceeds were received from:

General obligation bonds ...... (321,875) Certificates of participation ...... (274,050) (595,925)

$ (211,534)

Interest expense in the statement of activities differs from the amount reported in governmental funds because (1) additional accrued and accreted interest was calculated for bonds, notes payable and capital leases, and (2) amortization of bond discounts, premiums and refunding losses and gains are not expended within the fund statements.

Increase in accrued interest ...... $ (825) Loss on refundings on certificates of participation ...... 1,359 Amortization of bond premiums and discounts ...... 19,313 Amortization of bond refunding losses and gains...... (3,784) $ 16,063

60 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

(4) BUDGETARY RESULTS RECONCILED TO RESULTS IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

The budgetary process is based upon accounting for certain transactions on a basis other than generally accepted accounting principles (GAAP). The results of operations are presented in the budget-to-actual comparison statement in accordance with the budgetary process (Budget basis) to provide a meaningful comparison with the budget.

The major differences between the Budget basis “actual” and GAAP basis are timing differences. Timing differences represent transactions that are accounted for in different periods for Budget basis and GAAP basis reporting. Certain revenues accrued on a Budget basis have been deferred for GAAP reporting. These primarily relate to the accounting for property tax revenues under the Teeter Plan (Note 6), revenues not meeting the 60-day availability period and other assets not available for budgetary appropriation.

The fund balance of the General Fund as of June 30, 2016 on a Budget basis is reconciled to the fund balance on a GAAP basis as follows:

Fund Balance - Budget Basis………………………………………………………………………… $ 1,526,830 Unrealized Gains/ (Losses) on Investments………………………………………………………… 343 Cumulative Excess Property Tax Revenues Recognized on a Budget Basis…………………… (36,008) Cumulative Excess Health, Human Services, Franchise and Other Revenues Recognized on a Budget Basis……………………………………………………………… (56,709) Pre-paid lease revenue………………………………………………………………………………… (5,816) Nonspendable Fund Balance (Assets Reserved for Not Available for Appropriation)…………… 522 Fund Balance - GAAP basis………………………………………………………………… $ 1,429,162

General Fund budget basis fund balance as of June 30, 2016 is composed of the following: Not available for appropriations: Restricted Fund Balance: Rainy Day - Economic Stabilization Reserve...... $ 74,986 Rainy Day - One Time Spending Account...... 45,120 Committed Fund Balance: Budget Stabilization Reserve...... 178,434 Recreation and Parks Expenditure Saving Reserve...... 8,736 Assigned for Encumbrances…………………………………………………… 190,965 Assigned for Appropriation Carryforward……………………………………… 293,921 Assigned for Subsequent Years' Budgets: Budget Savings Incentive Program City-wide...... 58,907 Salaries and benefits costs (MOU)...... 18,203 Subtotal...... $ 869,272 Available for appropriations: Assigned for Litigation and Contingencies...... 145,443 Assigned balance subsequently appropriated as part of the General Fund budget for use in fiscal year 2016-17...... 172,128 Unassigned - General Reserve...... 76,913 Unassigned - Budget for use in fiscal year 2017-18...... 191,202 Unassigned - Contingency for fiscal year 2017-18...... 60,000 Unassigned - Available for future appropriations...... 11,872 Subtotal...... 657,558 Fund Balance, June 30, 2016 - Budget basis...... $ 1,526,830

61 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

(5) DEPOSITS AND INVESTMENTS

(a) Cash, Deposits and Investments Presentation

Total City cash, deposits and investments, at fair value, are as follows:

Component Primary Government Unit Gove r nm e nta l Business-type Fiduciary Activities Activities Funds Total TIDA Deposits and investments with City Treasury…………………………… $ 3,314,988 $ 2,370,166 $ 1,272,967 $ 6,958,121 $ 11,130 Deposits and investments outside City Treasury…………………………… 84,845 16,494 20,405,764 20,507,103 - Restricted assets: Deposits and investments with City Treasury………………………… - 947,407 - 947,407 - Deposits and investments outside City Treasury………………………… 25,349 735,744 - 761,093 - Invested in securities lending collateral… - - 865,681 865,681 - Total deposits & investments$ 3,425,182 $ 4,069,811 $ 22,544,412 $ 30,039,405 $ 11,130

Cash and deposits……………………… $ 228,638 $ - Investments……………………………… 29,810,767 11,130 Total deposits and investments……… $ 30,039,405 $ 11,130

(b) Investment Policies

Treasurer’s Pool

The City’s investment policy addresses the Treasurer’s safekeeping and custody practices with financial institutions in which the City deposits funds, types of permitted investment instruments, and the percentage of the portfolio which may be invested in certain instruments with longer terms to maturity. The objectives of the policy, in order of priority, are safety, liquidity, and earning a market rate of return on public funds. The City has established a Treasury Oversight Committee (Oversight Committee) as defined in the City Administrative Code section 10.80-3, comprised of various City officials, representatives of agencies with large cash balances, and members of the public, to monitor and review the management of public funds maintained in the investment pool in accordance with Sections 27130 to 27137 of the California Government Code. The Treasurer prepares and submits an investment report to the Mayor, the Board of Supervisors, members of the Oversight Committee and the investment pool participants every month. The report covers the type of investments in the pool, maturity dates, par value, actual cost, and fair value.

The investment policy places maturity limits based on the type of security. Investments held by the Treasurer during the year did not include repurchase agreements or reverse repurchase agreements. The table below identifies the investment types that are authorized by the City’s investment policy dated May 2016. The table also identifies certain provisions of the City’s investment policy that address interest rate risk and concentration of credit risk.

62 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Maximum Maximum Maximum Percentage of Investment in Authorized Investment Type Maturity Portfolio One Issuer U.S. Treasuries 5 years 100% 100% Federal Agencies 5 years 100% 100% State and Local Government Agency Obligations 5 years 20% 5% * Public Time Deposits 13 months * None None Negotiable Certificates of Deposit/Yankee Certificates of Deposit 5 years 30% None Bankers Acceptances 180 days 40% None Commercial Paper 270 days 25% * 10% Medium Term Notes 24 months * 25% * 10% * Repurchase Agreements (Government Securities) 1 year None N/A Repurchase Agreements (Securities permitted by CA Government Code, Sections 53601 and 53635) 1 year 10% N/A Reverse Repurchase Agreements / Securities Lending 45 days * None $75 million * Money Market (Institutional Government Funds) N/A 10% * N/A Money Market (Institutional Prime Funds) 60 days 5%* N/A Supranationals 5 years 5% * None State of California Local Agency Investment Fund (LAIF) N/A Statutory None * Represents restriction on which the City’s investment policy is more restrictive than the California Government Code.

The Treasurer also holds for safekeeping bequests, trust funds, and lease deposits for other City departments. The bequests and trust funds consist of stocks and debentures. Those instruments are valued at par, cost, or fair value at the time of donation.

Other Funds

Other funds consist primarily of deposits and investments with trustees related to the issuance of bonds and to certain loan programs operated by the City. These funds are invested either in accordance with bond covenants and are pledged for payment of principal, interest, and specified capital improvements or in accordance with grant agreements and may be restricted for the issuance of loans.

63 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Employees’ Retirement System The Retirement System’s investments are invested pursuant to investment policy guidelines as established by the Retirement Board. The objective of the policy is to maximize the expected return of the fund at an acceptable level of risk. The Retirement Board has established percentage guidelines for types of investments to ensure the portfolio is diversified.

Investment managers are required to diversify by issue, maturity, sector, coupon, and geography. Investment managers retained by the Retirement System follow specific investment guidelines and are evaluated against specific market benchmarks that represent their investment style. Any exemption from general guidelines requires approval from the Retirement Board. The Retirement System invests in securities with contractual cash flows, such as asset backed securities, commercial mortgage backed securities and collateralized mortgage obligations. The value, liquidity and related income of these securities are sensitive to changes in economic conditions, including real estate values, delinquencies or defaults, or both, and may be affected by shifts in the market’s perception of the issuers and changes in interest rates.

The investment policy permits investments in domestic and international debt and equity securities; real estate; securities lending; foreign currency contracts, derivative instruments, and private equity investments, which include investments in a variety of commingled partnership vehicles.

The Retirement Board’s asset allocation policies for the year ended June 30, 2016 are as follows: Target Allocation through Target Allocation since Asset Class January 2015 February 2015 Global Equity 47.0% 40.0% Fixed Income 25.0% 20.0% Private Equity 16.0% 18.0% Real Assets 12.0% 17.0% Hedge Funds/Absolute Return 0% 5.0% 100.0% 100.0% The Retirement System is not directly involved in repurchase or reverse repurchase agreements. However, external investment managers retained by the Retirement System may employ repurchase arrangements if the securities purchased or sold comply with the manager’s investment guidelines. The Retirement System monitors the investment activity of its investment managers to ensure compliance with guidelines. In addition, the Retirement System’s securities lending cash collateral separately managed account is authorized to use repurchase arrangements. As of June 30, 2016, $419.0 million (or 48.4% of cash collateral) consisted of such agreements.

Retiree Health Care Trust Fund The RHCTF’s investments outside of the City Treasury are invested pursuant to investment policy guidelines as established by the RHCTF Board. The objective of the policy is to manage fund assets so as to achieve the highest, reasonably prudent real return possible. The investment policy permits the RHCTF to invest in domestic and international equity securities and investment grade bonds. It also allows investments in global equity, U.S. nominal bonds, inflation-linked bonds, global real estate, and commodities, although the RHCTF does not currently hold assets in these classes. The RHCTF Board has established percentage guidelines for types of investments to ensure the portfolio is diversified, as follows: Asset Class Target Allocation Range Domestic Equity 37.0% 32.0-42.0% International Equity 37.0% 32.0-42.0% Investment Grade Bonds 26.0% 21.0-31.0% 100.0%

64 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

The City categorizes its fair value measurements within the fair value hierarchy established by generally accepted accounting principles. The hierarchy is based on the valuation inputs used to measure fair value of the assets. Level 1 inputs are quoted prices in an active market for identical assets; Level 2 inputs are significant other observable inputs; and Level 3 inputs are significant unobservable inputs (the City does not value any of its investments using Level 3 inputs). The inputs or methodology used for valuing securities are not an indication of risk associated with investing in those securities.

The following is a summary of inputs used in valuing the City’s investments as of June 30, 2016:

Fair Value Measurements Using Quoted Prices in Significant Active Markets Other for Identical Observable Unobservable Fair Value Assets Inputs Inputs 6/30/2016 (Level 1) (Level 2) (Level 3) Primary Government: Investments in City Treasury: U.S. Treasury Notes $ 501,077 $ 501,077 $ - $ - U.S. Agencies - Discount 296,560 296,560 - - U.S. Agencies - Coupon (no call option) 2,663,602 2,663,602 - - U.S. Agencies (callable option) 1,047,592 1,047,592 - - State and Local Agencies 193,556 - 193,556 - Negotiable Certificates of Deposits 1,241,116 1,191,126 49,990 - Corporate Notes 671,178 671,178 - - Supranationals 150,104 - 150,104 - Commercial Paper 449,127 - 449,127 - Public Time Deposits 1,440 * - - - Money Market Mutual Funds 555,450 * - - - Subtotal 7,770,802 $ 6,371,136 $ 842,776 $ -

Separately managed account: SFRDA South Beach Harbor Revenue Bond 675 Subtotal investments in City Treasury 7,771,477

Investments Outside City Treasury: (Governmental and Business - Type) U.S. Treasury Notes 297,606 $ 297,606 $ - $ - U.S. Agencies 184,291 184,291 - - Commercial Paper 16,212 * - - - Money Market Mutual Funds 468,176 * - - - Certificates of Deposit 304 * - - - Subtotal Investments Outside City Treasury 966,589 $ 481,897 $ - $ -

* Not subject to fair value hierarchy

(Continued)

65 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Fair Value Measurements Using Quoted Prices in Significant Active Markets Other for Identical Observable Unobservable Fair Value Assets Inputs Inputs 6/30/2016 (Level 1) (Level 2) (Level 3) Employees' Retirement System Investments Short Term Investments $ 1,009,676 $ - $ - $ 1,009,676 Debt Securities: U.S. Government & Agency Securities 695,309 - 695,309 - Other Debt Securities 2,246,680 - 2,134,644 112,036 Equity Securities: Domestic Equity 4,296,051 4,198,957 7,508 89,586 International Equity 3,087,999 3,077,546 7,961 2,492 Foreign Currency Contracts, net 14,125 - - 14,125 Invested securities lending collateral 865,681 - 389,095 476,586 Subtotal 12,215,521 $ 7,276,503 $ 3,234,517 $ 1,704,501

Investments measured at the net asset value (NAV) Fixed Income Funds Invested in: U.S. Government & Agency Securities 952,962 Other Fixed Income 822,065 Equity Funds Invested in: Domestic Equity 674,787 International Equity 1,216,026 Real Assets 2,341,500 Private Equity 2,750,619 Subtotal investments measured at the NAV 8,757,959 Total investments in Employees' Retirement System 20,973,480

Healthcare Trust (measurements at the NAV) Fixed Income: U.S. Debt Index Fund 30,100 Equities: Domestic: S&P 500 Equity Index Fund 39,026 International: EAFE Equity Index Fund 37,975 Money Market Investments Treasury Money Market Fund 3,250 * Total Investments in Healthcare Trust 110,351

Total Investments$ 29,821,897

* Not subject to fair value hierarchy

66 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Investments in City Treasury

U.S. Treasury Notes, U.S. Government Agencies, Corporate Notes, and Negotiable Certificates of Deposit are valued using quoted prices in active markets and classified in Level 1 of the fair value hierarchy.

State and Local agencies, Negotiable Certificates of Deposit, Commercial Paper and Supranationals are valued using a variety of techniques such as matrix pricing, market corroborated pricing inputs such as yield curve, indices, and other market related data and classified in Level 2 of the fair value hierarchy.

Money Market Funds and Public Time Deposits have maturities of one year or less from fiscal year end and are not subject to GASB Statement No. 72.

Investments Outside City Treasury

U.S. Treasury Notes and U.S. Government Agencies are valued using quoted prices in active markets and classified in Level 1 of the fair value hierarchy. Commercial Paper is valued using a variety of techniques such as matrix pricing, market corroborated pricing inputs such as yield curve, indices, and other market related data and are not subject to fair value hierarchy. Money Market Funds are valued at amortized costs and are not subject to fair value hierarchy.

Employees’ Retirement System investments

Investments, at Fair Value

Equity securities classified in Level 1 of the fair value hierarchy are valued using prices quoted in active markets issued by pricing vendors for these securities. Invested securities lending collateral and debt and equity securities classified in Level 2 of the fair value hierarchy are valued using prices determined by the use of matrix pricing techniques maintained by the various pricing vendors for these securities. Debt securities including short-term instruments are priced based on evaluated prices. Such evaluated prices may be determined by factors which include, but are not limited to, market quotations, yields, maturities, call features, ratings, institutional size trading in similar groups of securities and developments related to specific securities. For equity securities not traded on an active exchange, or if the closing price is not available, corroborated indicative quotes obtained from pricing vendors are generally used. Short-term investments and debt and equity securities classified in Level 3 of the fair value hierarchy are securities whose stated market prices are unobservable by the market place. Many of these securities are priced using uncorroborated indicative quotes, adjusted prices based on inputs from different sources, or evaluated prices using unobservable inputs, such as extrapolated data, proprietary models, and indicative quotes from pricing vendors.

Fair value is defined as the quoted market value on the last trading day of the period. In some cases, a valuation technique may have multiple inputs used to measure fair value, and each input might fall into a different level of the fair value hierarchy. The level in the fair value hierarchy within which a fair value measurement falls in its entirety is determined based on the lowest level input that is significant to the measurement. The prices used in determining the fair value hierarchy are obtained from various pricing sources by the Retirement System’s custodian bank.

Investments, at Net Asset Value (NAV)

Equity and Debt Funds

The equity and debt funds are commingled funds that are priced at net asset value by industry vendors and fund families. NAV is the market value of all securities owned by a fund, minus its total liabilities, divided by the number of shares issued and outstanding. The NAV of an open-end fund is its price.

67 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Real Assets, Private Equity, and Opportunistic Fixed Income Investments

The fair value of the Retirement System’s investments in real assets, private equity, and opportunistic fixed income investments are based on net asset values provided by the investment managers and general partners (hereinafter collectively referred to as the “General Partners”). Such value generally represents the Retirement System’s proportionate share of the net assets of the limited partnerships. The partnership financial statements are audited annually as of December 31 and the net asset value are adjusted by additional contributions to and distributions from the partnership, the Retirement System’s share of net earnings and losses, and unrealized gains and losses resulting from changes in fair value, as determined by the General Partners.

The General Partners may use one or more valuation methodologies outlined in FASB ASC 820, Fair Value Measurement. For some investments, little market activity may exist. The General Partners’ determination of fair value is then based on the best information available in the circumstances and may involve subjective assumptions and estimates, including the General Partners’ assessment that market participants would use in valuing the investments. The General Partners may take into consideration a combination of internal and external factors, including but not limit to, appropriate risk adjustments for nonperformance and liquidity. Such fair value estimates involve subjective judgments of unrealized gains and losses.

The values provided by the General Partners may differ significantly from the values that would have been used had a ready market existed for these investments.

Retiree Health Care Trust Fund

Investments, at Net Asset Value (NAV)

At June 30, 2016 the Retiree Health Care Trust Fund had investments in equity and debt commingled funds index funds and the City Treasury Pool. These funds include a S&P 500 Equity Index Fund, an EAFE Equity Index Fund, a U.S. Debt Index Fund and a Money Market Fund. The funds are priced at net asset value (NAV) by industry vendors and fund families. NAV is the market value of all securities owned by a fund, minus its total liabilities, divided by the number of shares issued and outstanding. As of June 30, 2016, there are no redemption restrictions on the commingled index funds.

(d) Investment Risks

Custodial Credit Risk - Deposits

Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, the City will not be able to recover its deposits or will not be able to recover collateral securities that are in the possession of an outside party. The California Government Code, the City’s investment policy and the Retirement System’s investment policy do not contain legal or policy requirements that would limit the exposure to custodial credit risk for deposits, other than the following provision. The California Government Code requires that a financial institution secure deposits made by state or local governmental units not covered by Federal Deposit Insurance Corporation insurance by pledging government securities as collateral. The market value of pledged securities must equal at least 110% of the type of collateral authorized in California Government Code, Section 53651 (a) through (i) of the City’s deposits. The collateral must be held at the pledging bank’s trust department or another bank, acting as the pledging bank’s agent, in the City’s name. As of June 30, 2016, $2.6 million of the business-type activities bank balances were exposed to custodial credit risk by not being insured or collateralized.

68 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Interest Rate Risk

Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment, the greater the sensitivity of its fair value to changes in interest rates. Information about the sensitivity to the fair values of the City’s investments to interest rate fluctuations is provided by the following tables, which shows the distribution of the City’s investments by maturity. The Retirement System’s interest rate risk information is discussed in section (f) of this note. Investment Maturities S & P Less than 1 to 5 Rating Fair Value 1 year years Primary Government: Investments in City Treasury: Pooled Investments: U.S. Treasury Notes AA+$ 501,077 $ 300,741 $ 200,336 U.S. Agencies NR - AA+ 4,007,754 1,563,904 2,443,850 State/Local Agencies A+ - AA- 193,556 86,247 107,309 Public time deposits NR 1,440 1,440 - Negotiable certificates of deposits A+ - AA- 1,241,116 1,141,226 99,890 Commercial paper A-1 - A-1+ 449,127 449,127 - Corporate notes A+ - AA- 671,178 586,121 85,057 Money market mutual funds AAAm 555,450 555,450 - Supranationals NR - AAA 150,104 124,994 25,110 Subtotal 7,770,802 4,809,250 2,961,552 Less: Treasure Island Development Authority Investments with City Treasury n/a (11,130) - (11,130) Less: Employees' Retirement System Investments with City Treasury n/a (6,656) - (6,656) Less: Health Care Trust Investments with City Treasury n/a (3,022) - (3,022) Subtotal pooled investments 7,749,994 4,809,250 2,940,744

Separately managed account: SFRDA South Beach Harbor Revenue Bond n/a 675 675 - Subtotal investments in City Treasury 7,750,669 $ 4,809,925 $ 2,940,744 Investments Outside City Treasury: (Governmental and Business - Type) U.S. Treas ury Notes NR/AAA/AA+$ 297,606 $ 104,073 $ 193,533 U.S. Agencies - Coupon AA+ 8,108 - 8,108 U.S. Agencies - Discount AA+/A-1+ 176,183 18,635 157,548 Certificates of Deposit NR 304 304 - Commercial Paper A-1+/A-1 16,212 16,212 - Money Market Mutual Funds AAAm 299,895 299,895 - U.S. Treasury Money Market Funds AAAm 168,281 168,281 - Subtotal investments outside City Treasury 966,589 $ 607,400 $ 359,189

Retiree Health Care Trust investments 113,373

Employees' Retirement System investments 20,980,136 Total Primary Government $ 29,810,767 Component Unit: Treasure Island Development Authority: Investments with City Treasury n/a 11,130 $ - $ 11,130

Total Investments $ 29,821,897

As of June 30, 2016, the investments in the City Treasury had a weighted average maturity of 372 days.

69 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Credit Risk

Credit risk is the risk that an issuer of an investment will not fulfill its obligation to pay the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. The Standard & Poor’s rating for each of the investment types are shown in the table above.

Custodial Credit Risk for Investments

Custodial credit risk for investments is the risk that, in the event of the failure of the counterparty to transaction, the City will not be able to recover the value of its investment or collateral securities that are in the possession of another party. The California Government Code and the City’s investment policy do not contain legal or policy requirements that would limit the exposure to custodial credit risk for investments; however, it is the practice of the City Treasurer that all investments are insured, registered or held by the Treasurer’s custodial agent in the City’s name. The governmental and business-type activities also have investments with trustees related to the issuance of bonds that are uninsured, unregistered and held by the counterparty’s trust departments but not in the City’s name. These amounts are included in the investments outside City Treasury shown in the table above.

Concentration of Credit Risk

The City’s investment policy contains no limitations on the amount that can be invested in any one issuer beyond that stipulated by the California Government Code and/or its investment policy. U.S. Treasury and agency securities explicitly guaranteed by the U.S. government are not subject to single issuer limitation.

As of June 30, 2016, the City Treasurer has investments in U.S. Agencies that represent 5% or more of the total Pool in the following:

Federal Farm Credit Bank ...... 19.1% Federal Home Loan Mortgage Corporation ...... 12.6% Federal Home Loan Bank ...... 11.5% Federal National Mortgage Association ...... 5.1%

In addition, the following major funds hold investments with trustees that represent 5% or more of the funds’ investments outside City Treasury as of June 30, 2016:

Airport: Federal National Mortgage Association ...... 29.0% Federal Home Loan Mortgage Corporation ...... 7.8%

Hetch Hetchy: Federal Farm Credit Bank ...... 46.8%

70 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

(e) Treasurer’s Pool

The following represents a condensed statement of net position and changes in net position for the Treasurer’s Pool as of June 30, 2016:

Statement of Net Position Net position held in trust for all pool participants………… $7,916,658

Equity of internal pool participants………………………… $7,172,086 Equity of separately managed account participant……… 677 Equity of external pool participants………………………… 743,895 Total equity………………………………………………… $7,916,658

Statement of Changes in Net Position Net position at July 1, 2015………………………………… $7,190,206 Net change in investments by pool participants………… 726,452 Net position at June 30, 2016…………………………… $7,916,658

The following provides a summary of key investment information for the Treasurer’s Pool as of June 30, 2016:

Type of Investment Rates Maturities Par Value Carrying Value Pooled Investments: U.S. Treasury Notes...... 0.67% - 1.21% 09/30/16 - 11/30/17$ 500,000 $ 501,077 U.S. Agencies - Coupon...... 0.03% - 2.09% 07/01/16 - 12/24/20 4,003,428 4,007,754 State and local agencies...... 0.44% - 1.66% 07/14/16 - 10/01/19 191,200 193,556 Public time deposits...... 0.72% - 1.05% 08/10/16 - 06/29/17 1,440 1,440 Negotiable certificates of deposit.. 0.64% - 1.17% 08/08/16 - 10/25/17 1,240,000 1,241,116 Commercial paper...... 0.50% - 1.02% 07/01/16 - 03/07/17 450,000 449,127 Corporate notes...... 0.34% - 1.36% 07/05/16 - 04/06/18 670,676 671,178 Money market mutual funds...... 0.22% - 0.30% 07/01/16 - 07/01/16 555,450 555,450 Supranationals...... 0.32% - 1.07% 07/01/16 - 10/05/18 150,000 150,104 $ 7,762,194 7,770,802 Segregated account: Local agencies...... 3.50% 12/1/2016$ 675 675 Carrying amount of deposits with Treasurer...... 145,181 Total cash and investments with Treasurer...... $ 7,916,658

71 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

(f) Retirement System’s Investments

The Retirement System’s investments as of June 30, 2016 are summarized as follows:

Fixed Income Investments: Short-term investments$ 1,009,676 Investments with City Treasury 6,656 Debt securities: U.S. Government and agencies 1,648,271 Other debt securities 3,068,745 Subtotal debt securities 4,717,016 Total fixed income investments 5,733,348 Equity securities: Domestic 4,970,838 International 4,304,025 Total equity securities 9,274,863 Real assets 2,341,500 Private equity 2,750,619 Foreign currency contracts, net 14,125 Investment in lending agent's short-term investment pool 865,681 Total Retirement System Investments $ 20,980,136

Interest Rate Risk

The Retirement System does not have a specific policy to manage interest rate risk. Below is a table depicting the segmented time distribution for fixed income investments based upon the expected maturity (in years) as of June 30, 2016:

Maturities Le ss tha n 1 Investment Type Fair Value year 1-5 years 6-10 years 10+ years Asset Backed Securities $ 178,327 $ - $ 57,102 $ 11,880 $ 109,345 Bank Loans 139,680 1,240 106,587 31,853 - City Investment Pool 6,656 4,119 2,537 - - Collateralized Bonds 167 - - - 167 Commercial Mortgage-Backed 438,764 6,254 6,708 5,558 420,244 Commingled and Other Fixed Income Funds 231,780 264,114 569 51 (32,954) Corporate Bonds 1,627,327 580,310 443,592 437,779 165,646 Corporate Convertible Bonds 293,360 3,460 197,038 35,709 57,153 Foreign Currencies and Cash Equivalents 144,456 144,456 - - - Government Agencies 971,329 952,962 368 - 17,999 Government Bonds 589,416 150,467 278,583 43,497 116,869 Government Mortgage Backed Securities 145,030 - 10,819 - 134,211 Index Linked Government Bonds 1,359 - - 1,243 116 Municipal/Provincial Bonds 40,049 - 9,182 1,628 29,239 Non-Government Backed Collateralized Mortgage Obligations 59,543 - 2,376 2,033 55,134 Options (64) (64) - - - Short Term Investment Funds 865,219 865,219 - - - Swaps 950 (78) 831 197 - Total$ 5,733,348 $ 2,972,459 $ 1,116,292 $ 571,428 $ 1,073,169

72 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Credit Risk

Fixed income investment managers typically are limited within their portfolios to no more than 5% exposure in any single security, with the exception of United States Treasury and government agency securities. The Retirement System’s credit risk policy is embedded in the individual investment manager agreements as prescribed and approved by the Retirement Board.

Investments are classified and rated using the lower of (1) Standard & Poor’s (S&P) rating or (2) Moody’s Investors Service (Moody’s) rating corresponding to the equivalent S&P rating. If only a Moody’s rating is available, the rating equivalent to S&P is used for the purpose of this disclosure.

The following table illustrates the Retirement System’s exposure to credit risk as of June 30, 2016. Investments issued or explicitly guaranteed by the U.S. government of $505.3 million as of June 30, 2016 are not considered to have credit risk and are excluded from the table below.

Fair Value as a Credit Rating Fair Value Percentage of Total AAA$ 164,327 3.1% AA 72,743 1.4% A 247,306 4.7% BBB 683,951 13.1% BB 322,941 6.2% B 294,025 5.6% CCC 79,658 1.5% CC 1,956 0.0% C 4,240 0.1% D 4,159 0.1% Not Rated 3,352,732 64.2% Total$ 5,228,038 100.0%

The securities listed as “Not Rated” include short-term investment funds, government mortgage backed securities, and investments that invest primarily in rated securities, such as commingled funds and money market funds, but do not themselves have a specific credit rating. Excluding these securities, the “Not Rated” component of credit would be approximately 12.7% for 2016.

Concentration of Credit Risk

Concentration of credit risk is the risk of loss attributed to the magnitude of the Retirement System’s investment in a single issuer. Guidelines for investment managers typically restrict a position to become no more than 5% (at fair value) of the investment manager’s portfolio. Securities issued or guaranteed by the U.S. government or its agencies are exempt from this limit.

As of June 30, 2016, the Retirement System had no investments of a single issuer that equaled or exceeded 5% of total Retirement System’s investments or net position.

Custodial Credit Risk

The Retirement System does not have a specific policy addressing custodial credit risk for investments, but investments are generally insured, registered, or held by the Retirement System or its agent in the Retirement System’s name. As of June 30, 2016, $153.6 million of the Retirement System’s investments were exposed to custodial credit risk because they were not insured or registered in the name of the Retirement System, and were held by the counterparty’s trust department or agent but not in the Retirement System’s name.

For fiscal year 2016, cash received as securities lending collateral is invested in a separate account managed by the lending agent using investment guidelines approved by the Retirement System and

73 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands) held by the Retirement System’s custodial bank. Securities in this separately managed account are not exposed to custodial credit risk.

Foreign Currency Risk

The Retirement System’s exposure to foreign currency risk derives from its positions in foreign currency denominated cash, equity, fixed income, private equity investments, real assets, and swap investments. The Retirement System’s investment policy allows international managers to enter into foreign exchange contracts, which are limited to hedging currency exposure existing in the portfolio.

The Retirement System’s net exposures to foreign currency risk as of June 30, 2016 are as follows:

Foreign Fixed Private Real Currency Currency Cash Equities Income Equities Asse ts Contracts Total Australian dollar $ 1,044 $ 103,293 $ - $ 10,641 $ - $ 2,650 $ 117,628 Brazilian real (581) 26,060 19,870 - - (5,475) 39,874 British pound sterling 717 533,900 12,635 - 18,874 (45,288) 520,838 Canadian dollar 1,027 69,596 6,851 - - 30,932 108,406 Chilean peso - 2,012 - - - 94 2,106 Chinese yuan renminbi - - - - - (1,582) (1,582) Colombian peso 63 - 5,451 - - 1,872 7,386 Czech koruna 101 337 - - - (101) 337 Danish krone 273 39,118 - - - (1,423) 37,968 Euro (4,323) 745,341 108,816 148,583 39,685 (66,038) 972,064 HK offshore Chinese yuan renminbi - - - - - (1,052) (1,052) Hong Kong dollar 567 162,696 - - - 3,862 167,125 Hungarian forint 137 327 - - - 2,515 2,979 Indian rupee - - - - - 564 564 Indonesian rupiah 16 11,124 10,163 - - 1,100 22,403 Japanese yen 4,587 532,091 - - 23,343 98,308 658,329 Malaysian ringgit 315 20,649 6,628 - - 4,087 31,679 Mexican peso 260 34,581 9,098 - - 4,764 48,703 New Israeli shekel 73 9,685 - - - 5,513 15,271 New Romanian leu 21 - 2,138 - - (740) 1,419 New Taiwan dollar 1,851 66,010 - - - (2,758) 65,103 New Zealand dollar 47 3,174 - - - 53,079 56,300 Norwegian krone 360 11,966 - - - (1,661) 10,665 Peruvian nuevo sol - - 2,398 - - (319) 2,079 Philippine peso (253) 2,641 811 - - (272) 2,927 Polish zloty 6 - 9,510 - - 2,280 11,796 Qatari rial - 5,448 - - - - 5,448 Russian ruble (571) - 5,857 - - 721 6,007 Singapore dollar 332 14,748 - - - 3,074 18,154 South African rand (948) 24,765 8,183 - - 2,250 34,250 South Korean won 1,361 98,501 - - - (75) 99,787 Swedish krona 1,230 65,241 - - - 9,961 76,432 Swiss franc 279 192,496 147 - - (33,363) 159,559 Thai baht 14 7,354 2,198 - - 6,696 16,262 Turkish lira 1,056 10,286 17,013 - - (7,381) 20,974 United Arab Emirates dirham - 5,893 - - - - 5,893 Total $ 9,061 $ 2,799,333 $ 227,767 $ 159,224 $ 81,902 $ 66,794 $ 3,344,081

Derivative Instruments

As of June 30, 2016, the derivative instruments held by the Retirement System are considered investments and not hedges for accounting purposes. The gains and losses arising from this activity are recognized as incurred in the statement of changes in fiduciary net position. All investment derivatives discussed below are included within the investment risk schedules, which precede this subsection. Investment derivative instruments are disclosed separately to provide a comprehensive and distinct view of this activity and its impact on the overall investment portfolio.

The fair value of the exchange traded derivative instruments, such as futures, options, rights and warrants are based on quoted market prices. The fair values of forward foreign currency contracts are determined using a pricing service, which uses published foreign exchange rates as the primary source. The fair values of swaps are determined by the Retirement System’s investment managers based on quoted market prices of the underlying investment instruments.

74 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

The table below presents the notional amounts, the fair value amounts, and the related net appreciation (depreciation) in the fair value of derivative instruments that were outstanding at June 30, 2016:

Net Appreciation Notional (Depreciation) in Derivative Type / Contracts Amount Fair Value Fair Value Forwards Foreign Exchange Contracts (a)$ 14,144 $ 14,144 Other Contracts (a) (114) (114) Options Foreign Exchange Contracts$ 8,426 (64) 4 Swaps Credit Contracts 2,300 (18) 12 Interest Rate Contracts 43,514 968 766 Rights/Warrants Equity Contracts 23,123 shares 1,857 (6,406) Total$ 16,773 $ 8,406

(a) The Retirement System’s investment managers enter into a wide variety of forward foreign exchange and other contracts, which frequently do not involve the U.S. dollar. As a result, a U.S. dollar-based notional value is not included.

All investment derivatives are reported as investments at fair value in the statement of fiduciary net position. Rights and warrants are reported in equity securities. Foreign exchange contracts are reported in foreign currency contracts, which also include spot contracts that are not derivatives. All other derivative contracts are reported in other debt securities. All changes in fair value are reported as net appreciation (depreciation) in fair value of investments in the statements of changes in fiduciary net position.

Counterparty Credit Risk

The Retirement System is exposed to credit risk on non-exchange traded derivative instruments that are in asset positions. As of June 30, 2016, the fair value of forward currency contracts (including foreign exchange contract options) to purchase and sell international currencies were $14.9 million and $0.8 million, respectively. The Retirement System’s counterparties to these contracts held credit ratings of A or better on 99.6% of the positions as assigned by one or more of the major credit rating organizations (S&P, Moody’s and/or Fitch) while 0.4% were not rated.

75 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Custodial Credit Risk

The custodial credit risk disclosure for exchange traded derivative instruments is made in accordance with the custodial credit risk disclosure requirements of GASB Statement No. 40. At June 30, 2016, all of the Retirement System’s investments in derivative instruments are held in the Retirement System’s name and are not exposed to custodial credit risk.

Interest Rate Risk

The table below describes the maturity periods of the derivative instruments exposed to interest rate risk at June 30, 2016.

Maturities Less than Derivative Type / Contracts Fair Value 1 year 1-5 years 6-10 years Forwards Foreign Exchange Contracts$ 14,144 $ 14,053 $ 91 $ - Options Foreign Exchange Contracts (64) (64) - - Swaps Credit Contracts (18) 2 (20) - Interest Rate Contracts 968 (80) 851 197 Total$ 15,030 $ 13,911 $ 922 $ 197

76 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

The following table details the reference rate, notional amount, and fair value of interest rate swaps that are highly sensitive to changes in interest rates as of June 30, 2016:

Notional Fair Investment Type Reference Rate Value Value Interest Rate Swap Receive Fixed 1.50%, Pay Variable 6-Month WIBOR$ 606 $ (1) Interest Rate Swap Receive Fixed 1.93%, Pay Variable 6-Month THB 301 4 Interest Rate Swap Receive Fixed 12.055%, Pay Variable 1-Day BIDOR 252 (2) Interest Rate Swap Receive Fixed 12.20%, Pay Variable 1-Day BIDOR 1,108 13 Interest Rate Swap Receive Fixed 12.23%, Pay Variable 1-Day BIDOR 203 (1) Interest Rate Swap Receive Fixed 12.255%, Pay Variable 1-Day BIDOR 5,381 (71) Interest Rate Swap Receive Fixed 12.85%, Pay Variable 1-Day BIDOR 298 19 Interest Rate Swap Receive Fixed 13.73%, Pay Variable 1-Day BIDOR 528 5 Interest Rate Swap Receive Fixed 15.44%, Pay Variable 1-Day BIDOR 588 104 Interest Rate Swap Receive Fixed 15.96%, Pay Variable 1-Day BIDOR 5,287 534 Interest Rate Swap Receive Fixed 16.15%, Pay Variable 1-Day BIDOR 824 172 Interest Rate Swap Receive Fixed 16.395%, Pay Variable 1-Day BIDOR 102 23 Interest Rate Swap Receive Fixed 16.40%, Pay Variable 1-Day BIDOR 127 30 Interest Rate Swap Receive Fixed 16.95%, Pay Variable 1-Day BIDOR 82 22 Interest Rate Swap Receive Fixed 2.015%, Pay Variable 6-Month THB 569 10 Interest Rate Swap Receive Fixed 2.12%, Pay Variable 6-Month THB 683 14 Interest Rate Swap Receive Fixed 2.175%, Pay Variable 6-Month THB 643 16 Interest Rate Swap Receive Fixed 2.19%, Pay Variable 6-Month THB 199 5 Interest Rate Swap Receive Fixed 2.22%, Pay Variable 6-Month THB 398 10 Interest Rate Swap Receive Fixed 2.58%, Pay Variable 6-Month THB 771 45 Interest Rate Swap Receive Fixed 2.625%, Pay Variable 6-Month THB 1,190 75 Interest Rate Swap Receive Fixed 2.78%, Pay Variable 6-Month THB 26 2 Interest Rate Swap Receive Fixed 5.21%, Pay Variable 1-Day MXIBR 596 (6) Interest Rate Swap Receive Fixed 5.23%, Pay Variable 3-Month CIBR 124 (5) Interest Rate Swap Receive Fixed 5.31%, Pay Variable 3-Month CIBR 48 (2) Interest Rate Swap Receive Fixed 5.32%, Pay Variable 3-Month CIBR 567 (20) Interest Rate Swap Receive Fixed 5.33%, Pay Variable 3-Month CIBR 574 (40) Interest Rate Swap Receive Fixed 5.61%, Pay Variable 28-Day MXIBR 1,724 6 Interest Rate Swap Receive Fixed 5.63%, Pay Variable 28-Day MXIBR 1,008 3 Interest Rate Swap Receive Fixed 5.84%, Pay Variable 28-Day MXIBR 341 4 Interest Rate Swap Receive Fixed 6.12%, Pay Variable 3-Month CIBR 112 (5) Interest Rate Swap Receive Fixed 6.20%, Pay Variable 3-Month CIBR 144 (5) Interest Rate Swap Receive Fixed 6.22%, Pay Variable 3-Month CIBR 151 (6) Interest Rate Swap Receive Fixed 6.24%, Pay Variable 28-Day MXIBR 136 4 Interest Rate Swap Receive Fixed 7.50%, Pay Variable 3-Month JIBAR 868 (22) Interest Rate Swap Receive Fixed 8.00%, Pay Variable 3-Month JIBAR 901 4 Interest Rate Swap Receive Fixed 8.50%, Pay Variable 3-Month JIBAR 1,831 36 Interest Rate Swap Receive Fixed 8.75%, Pay Variable 3-Month JIBAR 1,072 37 Interest Rate Swap Receive Fixed 9.00%, Pay Variable 3-Month JIBAR 205 9 Interest Rate Swap Receive Fixed 9.50%, Pay Variable 3-Month JIBAR 498 38 Interest Rate Swap Receive Variable 1-Day BIDOR, Pay Fixed 11.16% 96 7 Interest Rate Swap Receive Variable 1-Day BIDOR, Pay Fixed 12.86% 651 7 Interest Rate Swap Receive Variable 1-Day BIDOR, Pay Fixed 14.205% 5,133 (9) Interest Rate Swap Receive Variable 1-Day BIDOR, Pay Fixed 15.50% 1,125 (56) Interest Rate Swap Receive Variable 1-Day BIDOR, Pay Fixed 15.77% 1,635 (92) Interest Rate Swap Receive Variable 28-Day MXIBR, Pay Fixed 4.65% 423 2 Interest Rate Swap Receive Variable 28-Day MXIBR, Pay Fixed 5.66% 721 14 Interest Rate Swap Receive Variable 28-Day MXIBR, Pay Fixed 6.08% 1,241 (3) Interest Rate Swap Receive Variable 28-Day MXIBR, Pay Fixed 6.32% 363 (8) Interest Rate Swap Receive Variable 28-Day MXIBR, Pay Fixed 6.50% 244 (1) Interest Rate Swap Receive Variable 3-Month CIBR, Pay Fixed 6.42% 223 6 Interest Rate Swap Receive Variable 3-Month CIBR, Pay Fixed 6.43% 69 2 Interest Rate Swap Receive Fixed 2.81%, Pay Return THB 524 41 Total Interest Rate Swap $ 43,514 $ 968

77 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Foreign Currency Risk

At June 30, 2016, the Retirement System is exposed to foreign currency risk on its investments in forwards, rights, warrants, and swaps denominated in foreign currencies. Below is the derivative instruments foreign currency risk analysis as of June 30, 2016:

Rights/ Currency Forwards Warrants Swaps Total Australian dollar$ 2,650 $ - $ - $ 2,650 Brazilian real (5,349) - 703 (4,646) British pound sterling (43,351) - - (43,351) Canadian dollar 31,384 - - 31,384 Chilean peso 94 - - 94 Chinese yuan renminbi (1,582) - - (1,582) Colombian peso 1,872 - (74) 1,798 Czech koruna (45) - - (45) Danish krone (1,423) - - (1,423) Euro (67,878) 75 - (67,803) HK offshore Chinese yuan renminbi (1,052) - - (1,052) Hong Kong dollar 3,569 - - 3,569 Hungarian forint 2,652 - - 2,652 Indian rupee 564 - - 564 Indonesian rupiah 1,100 - - 1,100 Japanese yen 100,599 - - 100,599 Malaysian ringgit 4,087 - - 4,087 Mexican peso 3,471 - 16 3,487 New Israeli shekel 5,513 - - 5,513 New Romanian Leu (740) - - (740) New Russian ruble 150 - - 150 New Taiwan dollar (2,758) - - (2,758) New Zealand dollar 53,079 - - 53,079 Norwegian krone (1,656) 87 - (1,569) Peruvian nuevo sol (319) - - (319) Philippine peso (272) - - (272) Polish zloty 1,865 - (1) 1,864 Singapore dollar 3,074 - - 3,074 South African rand 2,689 - 101 2,790 South Korean won (75) - - (75) Swedish krona 10,958 - - 10,958 Swiss franc (33,477) - - (33,477) Thai baht 6,696 - 222 6,918 Turkish lira (6,647) - - (6,647) Total$ 69,442 $ 162 $ 967 $ 70,571

Contingent Features

At June 30, 2016, the Retirement System held no positions in derivatives containing contingent features.

78 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Securities Lending

The Retirement System lends U.S. government obligations, domestic and international bonds, and equities to various brokers with a simultaneous agreement to return collateral for the same securities plus a fee in the future. The securities lending agent manages the securities lending program and receives securities and cash as collateral. Cash and non-cash collateral is pledged at 102% and 105% of the fair value of domestic securities and international securities lent, respectively. There are no restrictions on the number of securities that can be lent at one time. However, starting in the year ended June 30, 2009, the Retirement System engaged in a systematic reduction of the value of securities on loan with a target of no more than ten percent (10%) of total fund assets on loan at any time. The term to maturity of the loaned securities is generally not matched with the term to maturity of the investment of the corresponding collateral.

The Retirement System does not have the ability to pledge or sell collateral securities unless a borrower defaults. The securities collateral is not reported on the statement of fiduciary net position. As of June 30, 2016, the Retirement System has no credit risk exposure to borrowers because the amounts the Retirement System owes them exceed the amounts they owe the Retirement System. As with other extensions of credit, the Retirement System may bear the risk of delay in recovery or of rights in the collateral should the borrower of securities fail financially. However, the lending agent indemnifies the Retirement System against all borrower defaults.

As of June 30, 2016, the Retirement System lent $1.2 billion in securities and received collateral of $0.9 billion and $0.4 billion in cash and securities, respectively, from borrowers. The cash collateral is invested in a separately managed account by the lending agent using investment guidelines approved by the Retirement Board. Due to the increase in the fair value of assets held in the separately managed account, the Retirement System’s invested cash collateral was valued at $0.9 billion. The net unrealized gain of $2.1 million is presented as part of the net appreciation (depreciation) in fair value of investments in the statement of changes in the fiduciary net position in the year in which the unrealized gains or losses occur. The Retirement System is exposed to investment risk including the possible loss of principal value in the separately managed securities lending account due to the fluctuation in the fair value of assets held in the account.

79 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

The Retirement System’s securities lending transactions as of June 30, 2016, are summarized in the following table:

Fair Value of Cash Fair Value of Non- Investment Type Loaned Securities Collateral Cash Collateral Securities on Loan for Cash Collateral International Corporate Fixed Income $ 5,600 $ 5,842 $ - International Equities 40,741 42,797 - International Government Fixed 1,105 1,153 - U.S. Government Agencies 204 208 - U.S. Corporate Fixed Income 114,536 116,353 - U.S. Equities 439,182 445,863 - U.S. Government Fixed Income 247,020 251,320 -

Securities on Loan for Non-Cash Collateral International Corporate Fixed Income 8,736 - 9,163 International Equities 295,913 - 315,144 International Government Fixed 105 - 110 U.S. Corporate Fixed Income 6,132 - 6,225 U.S. Equities 37,080 - 37,609 Total $ 1,196,354 $ 863,536 $ 368,251

The following table presents the segmented time distribution, based upon the expected maturity (in years), for investments within the short term investment pool in which the securities lending cash collateral is invested, as of June 30, 2016.

Maturity Less Investment Type Fair Value Than 1 Year Commercial Paper$ 44,260 $ 44,260 Negotiable Certificates of Deposit 345,116 345,116 Repurchase Agreements 419,000 419,000 Short Term Investment Funds 57,305 57,305 Total $ 865,681 $ 865,681

The Retirement System’s exposure to credit risk in its reinvested cash collateral account as of June 30, 2016 is as follows:

Fair Value as a Credit Rating Fair Value Percentage of Total AA$ 153,323 17.7% A337,078 38.9% Not Rated * 375,280 43.4% Total $ 865,681 100.0%

* Repurchase agreements of $270.0 million are not rated by Moody’s, but are held by counterparties with S&P ratings of A or AA.

80 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Investments in Real Assets Holdings

Real assets investments represent the Retirement System’s interests in real assets limited partnerships and separate accounts. The changes in these investments during the year ended June 30, 2016 are summarized as follows: Investments: Beginning of the year$ 1,975,926 Capital investments 1,318,111 Equity in net earnings 48,492 Net appreciation in fair value 168,196 Capital distributions (1,169,225) End of the year$ 2,341,500

The Retirement System has established leverage limits for each investment style based on the risk/return profile of the underlying investments. The leverage limits for core and value-added real estate investments are 40% and 65%, respectively. The leverage limits for high return real estate investments depend on each specific offering. Outstanding mortgages for the Retirement System’s real estate investments were $492.2 million including $26.7 million in recourse debt at June 30, 2016. The underlying real estate holdings are valued periodically based on appraisals performed by independent appraisers in accordance with Uniform Standards of Professional Appraisal Practice. Such fair value estimates involve subjective judgments of unrealized gains and losses, and the actual market price of the real estate can only be determined by negotiation between independent third parties in a purchase and sale transaction.

(g) Retiree Health Care Trust Fund

Interest Rate Risk

Interest rate risk is the risk that changes in interest rates may adversely affect the fair value of an investment. Generally, the longer the maturity of an investment, the greater the sensitivity of its fair value to changes in market interest rates. The RHCTF does not have a specific policy to manage interest rate risk.

As of June 30, 2016, the weighted average maturities in years for the RHCTF’s fixed income investments were as follows: Investment Type Weighted Average Maturity in Years US Debt Index Fund 7.45 City Investment Pool 1.02 Treasury Money Market Fund 0.15

Credit Risk

Credit risk is the risk that an issuer or other counterparty to an investment may not fulfill its obligations. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. The City’s investment pool is not rated. Although the RHCTF’s fixed income investments in various commingled funds are not rated, the issuers/sponsors of the funds are rated as of June 30, 2016 as follows:

Issuer/Sponsors Investment Type S&P Moody’s Northern Trust Company Equity Index Funds, Money Market Fund A+ A2 Blackrock US Debt Index Fund AA- A1

81 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

(6) PROPERTY TAXES

The City is responsible for assessing, collecting, and distributing property taxes in accordance with enabling state law. Property taxes are levied on both real and personal property. Liens for secured property taxes attach on January 1st preceding the fiscal year for which taxes are levied. Secured property taxes are levied on the first business day of September and are payable in two equal installments: the first is due on November 1st and delinquent with penalties after December 10th; the second is due February 1st and delinquent with penalties after April 10th. Secured property taxes that are delinquent and unpaid as of June 30th are subject to redemption penalties, costs, and interest when paid. If not paid at the end of five years, the secured property may be sold at public auction and the proceeds used to pay delinquent amounts due. Any excess is remitted, if claimed, to the taxpayer. Unsecured personal property taxes do not represent a lien on real property. Those taxes are levied on January 1st and become delinquent with penalties after August 31st. Supplemental property tax assessments associated with changes in the assessed valuation due to transfer of ownership in property or upon completion of new construction are levied in two equal installments and have variable due dates based on the date the bill is mailed.

Since the passage of California’s Proposition 13, beginning with fiscal year 1978-1979, general property taxes are based either on a flat 1% rate applied to the adjusted 1975-1976 value of the property and new construction value added after the 1975-1976 valuation or on a flat 1% rate of the sales price of the property for changes in ownership. Taxable values on properties (exclusive of increases related to sales and construction) can rise or be adjusted at the lesser of 2% per year or the inflation rate as determined by the Board of Equalization’s California Consumer Price Index.

The Proposition 13 limitations on general property taxes do not limit taxes levied to pay the interest and redemption charges on any indebtedness approved by the voters prior to June 6, 1978 (the date of passage of Proposition 13). Proposition 13 was amended in 1986 to allow property taxes in excess of the 1% tax rate limit to fund general obligation bond debt service when such bonds are approved by two-thirds of the local voters. In 2000, California voters approved Proposition 39, which set the approval threshold at 55% for school facilities-related bonds. These “override” taxes for the City’s debt service amounted to approximately $241 million for the year ended June 30, 2016.

Taxable valuation for the year ended June 30, 2016 (net of non-reimbursable exemptions, reimbursable exemptions, and tax increment allocations to the Successor Agency) was approximately $178 billion, an increase of 6.9%. The secured tax rate was $1.1826 per $100 of assessed valuation. After adjusting for a State mandated property tax shift to schools, the tax rate is comprised of: about $0.65 for general government, about $0.35 for other taxing entities including the San Francisco Unified School District, San Francisco Community College District, the Bay Area Air Quality Management District and the Bay Area Rapid Transit District, and also $0.1826 for bond debt service. Delinquencies in the current year on secured taxes and unsecured taxes amounted to 0.66% and 5.09%, respectively, of the current year tax levy, for an average delinquency rate of 0.93% of the current year tax levy.

As established by the Teeter Plan, the Controller allocates to the City and other agencies 100% of the secured property taxes billed but not yet collected by the City; in return, as the delinquent property taxes and associated penalties and interest are collected, the City retains such tax amounts in the Agency Fund. To the extent the Agency Fund balances are higher than required; transfers may be made to benefit the City’s General Fund on a budgetary basis. The balance of the tax loss reserve as of June 30, 2016 was $22.9 million, which is included in the Agency Fund for reporting purposes. The City has funded payment of accrued and current delinquencies, together with the required reserve, from interfund borrowing.

82 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

(7) CAPITAL ASSETS

Primary Government Capital asset activity of the primary government for the year ended June 30, 2016 was as follows: Balance Balance July 1, June 30, Governmental Activities: 2015 Increases * Decreases * 2016 Capital assets, not being depreciated: Land...... $ 299,911 $ 34,350 $ - $ 334,261 Intangible assets...... 8,716 28,468 (6,014) 31,170 Construction in progress...... 1,245,064 321,030 (1,110,001) 456,093 Total capital assets, not being depreciated...... 1,553,691 383,848 (1,116,015) 821,524

Capital assets, being depreciated: Facilities and improvements...... 3,534,003 905,660 - 4,439,663 Machinery and equipment...... 430,807 151,214 (11,073) 570,948 Infrastructure...... 799,764 57,439 - 857,203 Intangible assets...... 48,411 5,850 - 54,261 Total capital assets, being depreciated...... 4,812,985 1,120,163 (11,073) 5,922,075

Less accumulated depreciation for: Facilities and improvements...... 989,887 77,593 - 1,067,480 Machinery and equipment...... 354,605 25,995 (10,985) 369,615 Infrastructure...... 140,262 30,576 - 170,838 Intangible assets...... 7,212 3,102 - 10,314 Total accumulated depreciation...... 1,491,966 137,266 (10,985) 1,618,247 Total capital assets, being depreciated, net...... 3,321,019 982,897 (88) 4,303,828 Governmental activities capital assets, net...... $ 4,874,710 $ 1,366,745 $ (1,116,103) $ 5,125,352

Busine ss-Type Activitie s: Capital assets, not being depreciated: Land...... $ 217,441 $ - $ - $ 217,441 Intangible assets...... 12,043 - - 12,043 Construction in progress...... 3,104,166 1,445,023 (1,428,728) 3,120,461 Total capital assets, not being depreciated...... 3,333,650 1,445,023 (1,428,728) 3,349,945

Capital assets, being depreciated: Facilities and improvements...... 15,114,928 1,165,666 (34,165) 16,246,429 Machinery and equipment...... 2,289,042 347,313 (67,314) 2,569,041 Infrastructure...... 1,270,624 19,582 - 1,290,206 Property held under Lease...... 697 - - 697 Intangible assets...... 214,810 4,190 - 219,000 Total capital assets, being depreciated...... 18,890,101 1,536,751 (101,479) 20,325,373

Less accumulated depreciation for: Facilities and improvements...... 5,398,350 388,005 (24,261) 5,762,094 Machinery and equipment...... 1,362,063 154,496 (60,378) 1,456,181 Infrastructure...... 551,384 37,793 - 589,177 Property held under lease...... 697 - - 697 Intangible assets...... 161,051 10,301 - 171,352 Total accumulated depreciation...... 7,473,545 590,595 (84,639) 7,979,501 Total capital assets, being depreciated, net...... 11,416,556 946,156 (16,840) 12,345,872 Business-type activities capital assets, net...... $ 14,750,206 $ 2,391,179 $ (1,445,568) $ 15,695,817 * The increases and decreases include transfers of categories of capital assets from construction in progress to depreciable categories.

83 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Depreciation expense was charged to functions/programs of the primary government as follows: Governm ent al A c t ivit ies : Public protection...... $ 24,247 Public works transportation and commerce...... 29,285 Human welfare and neighborhood development...... 629 Community Health...... 4,145 Culture and recreation...... 52,210 General administration and finance...... 23,952 Capital assets held by the City's internal service funds charged to the various functions on a prorated bases...... 2,798 Total depreciation expense - governmental activities...... $ 137,266

Business-type activities: Airport………………………………………………………………………$ 228,359 Water……………………………………………………………………… 106,666 Power……………………………………………………………………… 16,513 Transportation…………………………………………………………… 133,715 Hospitals………………………………………………………………… 32,619 Wastewater……………………………………………………………… 50,799 Port………………………………………………………………………… 21,924 Total depreciation expense - business-type activities……………………$ 590,595

Equipment is generally estimated to have useful lives of 2 to 40 years, except for certain equipment of the Water Enterprise that has an estimated useful life of up to 75 years. Facilities and improvements are generally estimated to have useful lives from 15 to 50 years, except for utility type assets of the Water Enterprise, Hetch Hetchy, the Wastewater Enterprise, the SFMTA, and the Port that have estimated useful lives from 51 to 175 years. These long-lived assets include reservoirs, aqueducts, pumping stations of Hetch Hetchy, Cable Car Barn facilities and structures of SFMTA, and pier substructures of the Port, which totaled $3.7 billion as of June 30, 2016. Hetch Hetchy Water had intangible assets of water rights having estimated useful lives from 51 to 100 years, which totaled $45.6 million as of June 30, 2016. The Airport had $6.9 million in intangible assets of permanent easements. In addition, the Water Enterprise had utility type assets with useful lives over 100 years, which totaled $6.8 million as of June 30, 2016.

In fiscal year 2015-16, the Airport had write-offs and loss on disposal in the amount of $13.1 million primarily due to disposal. During fiscal year ended June 30, 2016, the Water Enterprise, Hetch Hetchy, and the Wastewater Enterprise expensed $0.4 million, $4.9 million, and $5.5 million, respectively, related to capitalized design and planning costs on certain projects that were discontinued.

During the fiscal year ended June 30, 2016, the City’s enterprise funds incurred total interest expense and interest income of approximately $494.6 million and $25.8 million, respectively. Of these amounts, interest expense of approximately $88.2 million was capitalized.

84 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

(8) BONDS, LOANS, CAPITAL LEASES AND OTHER PAYABLES

Changes in Short-Term Obligations

The changes in short-term obligations for governmental and business-type activities for the year ended June 30, 2016, are as follows:

July 1, Additional Current June 30, Type of Obligation 2015 Obligation Maturities 2016

Governmental activities: Commercial paper Multiple Capital Projects……………………………………….. $ 157,766 $ 684,861 $ (739,849) $ 102,778 Governmental activities short-term obligations…………… $ 157,766 $ 684,861 $ (739,849) $ 102,778

Business-type activities: Commercial paper San Francisco General Hospital………………………...…… $ 3,761 $ 28,572 $ (3,761) $ 28,572 San Francisco International Airport…………………………… 40,000 304,100 (1,050) 343,050 San Francisco Water Enterprise……………………………… 186,000 236,000 (186,000) 236,000 San Francisco Wastewater Enterprise………………………… 100,000 61,000 (100,000) 61,000 Business-type activities short-term obligations……………$ 329,761 $ 629,672 $ (290,811) $ 668,622

City and County of San Francisco Commercial Paper Program The City launched its commercial paper (CP) program to pay for project costs in connection with the acquisition, improvement, renovation and construction of real property and the acquisition of capital equipment and vehicles (Resolution No. 85-09). Pursuant to Resolution No. 85-09 approved in March 2009, the Board of Supervisors established a $150.0 million commercial paper program. Pursuant to Resolution 247-13, the authorization of the commercial paper program was increased to $250.0 million from $150.0 million. The City currently has letters of credit supporting the $250.0 million program.

The CP is an alternative form of short-term (or interim) financing for capital projects that permits the City to pay project costs as project expenditures are incurred. The CP notes are issued and short-term debt is incurred only when needed to pay project costs as they are incurred. The CP has a fixed maturity date from one to 270 days and generally matures in 270 days. The CP notes are supported by two Revolving Credit Agreements (RCA) issued by State Street Bank and Trust Company (“State Street Bank”) and U.S. Bank N.A. with a fee of 0.45% and 0.45%, respectively and a Letter of Credit Agreement (LOC) issued by State Street Bank with a fee of 0.50%. The State Street Bank and US Bank N.A. RCAs are scheduled to expire in May 2021 and the State Street Bank LOC is scheduled to expire in February 2019.

In fiscal year 2016, the City retired $743.6 million and issued $713.4 million CP to provide interim financing for the acquisition and improvement of various approved capital projects: the purchase of capital equipment for the San Francisco General Hospital and Trauma Center, rebuilding of severely distressed public housing sites while increasing affordable housing and ownership opportunities and improving the quality of life for existing residents and the surrounding communities (HOPE SF), War Memorial Veterans Building seismic retrofit and Moscone Center expansion. As of June 30, 2016, the outstanding principal amount of tax exempt and taxable CP was $119.9 million and $11.5 million, respectively. The tax exempt and taxable CP bear interest rates ranging from 0.43% to 0.47% and 0.53%, respectively.

85 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

San Francisco International Airport In May 1997, the Airport adopted Resolution No. 97-0146, as amended and supplemented (the “Note Resolution”), authorizing the issuance of CP in an aggregate principal amount not to exceed the lesser of $400.0 million or the stated amount of the letter(s) of credit securing the CP. The Airport issues CP in series that are subdivided into subseries according to tax status and that are secured by direct-pay LOC. In addition to the applicable LOC, the CP notes are further secured by a pledge of the Net Revenues of the Airport, subject to the prior payment of the Airports’ Second Series Revenue Bonds (the Senior Bonds) outstanding from time to time under Resolution No. 91-0210, adopted by the Airport on December 3, 1991, as amended and supplemented (the Senior Bond Resolution). Net Revenues are generally defined in the Note Resolution as all revenues earned by the Airport from or with respect to its possession, management, supervision, operation and control of the Airport (not including certain amounts specified in the Note Resolution), less Operation and Maintenance Expenses (as defined in the Note Resolution).

The CP notes are special, limited obligations of the Airport, and the payment of the principal of and interest on the CP notes is secured by a pledge of, lien on and security interest in the Net Revenues and amounts in the funds and accounts provided in the Note Resolution, subject to the prior payment of principal of and interest on the Senior Bonds. The CP notes are secured on parity with any other bonds or other obligations from time to time outstanding under the Note Resolution.

During fiscal year 2016, the CP program was supported by two $100.0 million principal amount direct- pay LOC issued by State Street Bank and Trust Company and Wells Fargo Bank, National Association, with expiration dates of May 2, 2019, and May 31 2019, respectively, and a third LOC issued by Royal Bank of Canada in the principal amount of $200.0 million with expiration date of May 19, 2017. Each of the LOC supports separate subseries of CP and permits the Airport to issue CP up to a combined maximum principal amount of $400.0 million as of June 30, 2016. As of June 30, 2016, there were no obligations other than the CP notes outstanding under the Note Resolution.

During fiscal year 2016, the Airport issued $280.4 million of new money CP (AMT) and $22.7 million (Non-AMT) to fund capital improvement projects. The Airport also issued and retired $1.1 million of new money CP (taxable) during fiscal year 2016 to fund costs related to various bond and note transactions. As of June 30, 2016, the interest rates on taxable, AMT and Non-AMT CP were 0.55%, 0.02% to 0.58%, and 0.05% to 0.52%, respectively.

San Francisco Water Enterprise The San Francisco Public Utilities Commission and the Board of Supervisors have authorized the issuance of up to $500.0 million in CP pursuant to the voter-approved 2002 Proposition E. Prior to June 2014, the $500.0 million CP authorization was comprised of $250.0 million pursuant to voter- approved 2002 Proposition A, and $250.0 million pursuant to voter-approved Proposition E. As of June 30, 2016, no CP was outstanding under Proposition A. Amounts outstanding under Proposition E were $236.0 million at June 30, 2016. CP interest rates ranged from 0.1% to 0.6%. With maturities up to 270 days, the Water Enterprise intends to maintain the program by remarketing the CP upon maturity over the near-to-medium term, at which time outstanding CP will likely be refunded with revenue bonds. This is being done to take advantage of the continued low interest rate environment. If the CP interest rates rise to a level that exceeds these benefits, the Water Enterprise will refinance the CP with long-term, fixed rate debt.

86 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Hetch Hetchy Water and Power

Effective December 2015, under Charter Sections 9.107(6) and 9.107(8), the San Francisco Public Utilities Commission and Board of Supervisors authorized the issuance of up to $90.0 million in CP for the purpose of reconstruction or replacement of existing generation, transmission and distribution facilities of the Hetch Hetchy Power. Hetch Hetchy Water and Power had no commercial paper outstanding as of June 30, 2016.

San Francisco Wastewater Enterprise Under the voter-approved 2002 Proposition E, the San Francisco Public Utilities Commission and Board of Supervisors authorized the issuance of up to $500.0 million in CP for the purpose of reconstructing, expanding, repairing, or improving the Wastewater Enterprise’s facilities. The Enterprise had $61.0 million CP outstanding as June 30, 2016.

San Francisco Municipal Transportation Agency

In June 2013, pursuant to the City Charter Section 8A.102 (b) 13, the SFMTA Board of Directors authorized the issuance of CP notes in an aggregate principal amount not to exceed $100.0 million. In July 2013, the Board of Supervisors concurred with the issuance. The CP is secured by an irrevocable LOC from the State Street Bank and Trust Company issued on September 10, 2013 for a term of five years and interest rate not to exceed 12% per annum. The LOC will cover the principal as well as the interest accrued on the 270 days prior to the maturity date. The CP program is jointly administered by the Office of Public Finance (OPF) and SFMTA. OPF will be initiating the issuance of CP with the dealers and reporting on the CP program. The CP will be issued from time to time on a revolving basis to pay for Board-approved project costs in the Capital Improvement Program and other related uses. SFMTA will be requesting drawdowns based on cash flow needs and expenditures schedules. No CP notes have been drawn or outstanding as of June 30, 2016.

87 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Long-Term Obligations

The following is a summary of long-term obligations of the City as of June 30, 2016:

GOVERNMENTAL ACTIVITIES

Final Remaining Maturity Interest Type Of Obligation and Purpose Date Rates Amount GENERA L OBLIGA TION BONDS (a): Earthquake safety and emergency response…………………… 2035 2.25% - 5.00%$ 469,540 Parks and playgrounds ...... 2035 2.00% - 6.26% 175,050 Road repaving and street safety ...... 2035 2.00% - 5.00% 176,250 San Francisco General Hospital………………………………… 2033 3.25% - 6.26% 573,085 Seismic safety loan program ...... 2035 1.037% - 5.83%* 46,767 Transportation and road improvement ...... 2035 2.75% - 5.00% 47,005 Refunding ...... 2030 4.00% - 5.00% 523,360 General obligation bonds ...... 2,011,057

LEA SE REV ENUE BONDS: San Francisco Finance Corporation (b), (e) & (f)...... 2034 0.425% - 5.75% ** 196,055

CERTIFICA TES OF PA RTICIPA TION: Certificates of participation (c) & (d) ...... 2045 1.096% - 5.00% 589,580

OTHER LONG TERM OBLIGA TIONS: Loans (d) & (f) ...... 2045 2.00% - 5.74% 28,395 Revolving credit agreement loan - Transportation Authority (c) . 2018 0.62% *** 114,664 Governmental activities total long-term obligations……… $ 2,939,751

* Includes the 1992 Seismic Safety Loan Program GOB Series 2015A w hich bears variable interest rate that resets monthly. The rate for GOB Series 2015A at June 30, 2016 w as 1.037%. ** Includes the Moscone Center West Expansion Project Refunding Bonds Series 2008 - 1 & 2, both of w hich w ere financed w ith variable rate bonds that reset w eekly. The rate at June 30, 2016 for Series 2008 -1 & 2 averaged to 0.425%. *** The Revolving credit agreement loan interest rate equals to the sum of 70% of 1-month LIBOR plus 30%.

Debt service payments are made from the following sources:

(a) Property tax recorded in the Debt Service Fund. (b) Lease revenues from participating departments in the General, Special Revenue and Enterprise Funds. (c) Sales tax revenues recorded in the Transportation Authority Special Revenue Fund. (d) Revenues recorded in the General Fund. (e) Hotel taxes and other revenues recorded in the General and Special Revenue Funds. (f) User-charge reimbursements from the General, Special Revenue and Enterprise Funds.

Internal Service Funds serve primarily the governmental funds. Accordingly, long-term liabilities for the Internal Service Funds are included in the above amounts.

88 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

BUSINESS-TYPE ACTIVITIES Final Remaining Maturity Interest Entity and Type of Obligation Date Rates Amount San Francisco International Airport: Revenue bonds *...... 2044 2.00% - 6.00%*$ 4,234,725

San Francisco Water Enterprise: Revenue bonds ...... 2051 1.80% - 6.95% 4,075,890 Certificates of participation ...... 2042 2.00% - 6.49% 111,405 Accreted interest…………………………………………………… 2019 - 5,860

Hetch Hetchy Water and Pow er: Energy and revenue bonds ...... 2046 0.00% - 5.00% 55,599 Certificates of participation………………………...………………. 2042 2.00% - 6.49% 15,167

Municipal Transportation Agency: Revenue bonds……………………………………………………… 2044 3.00% - 5.00% 185,835 Loans………………………………………………………………… 2019 2.86% 76

San Francisco General Hospital Medical Center: Certificates of participation………………………………………… 2026 5.55% 17,082 Capital leases………………………………………………………… 2017 2.41% - 2.66% 258 San Francisco Wastew ater Enterprise: Revenue bonds ...... 2047 1.00% - 5.82% 978,135 Certificates of participation ...... 2042 2.00% - 6.49% 29,458

Port of San Francisco: Revenue bonds ...... 2044 1.60% - 7.408% 54,125 Certificates of participation………………………………………… 2038 4.00% - 5.25% 33,335 Loans ...... 2029 4.50% 2,244

Laguna Honda Hospital: Certificates of participation ...... 2031 4.30% - 5.25% 131,710 Capital leases………………………………………………………… 2017 4.00% 8 Business-type activities total long-term obligations ...... $ 9,930,912

______

* Includes Second Series Revenue Bonds Issue 36 A, B & C, 37C and 2010A, which were issued as variable rate bonds in a weekly mode. For the fiscal year ended June 30, 2016, the average interest rates on Issue 36A, 36B, 36C and 37C were 0.12%, 0.11%, 0.12%, & 0.11%, respectively; for Issue 2010A-1, 2010A-2 and 2010A-3 rates were 0.12%, 0.12% and 0.12%, respectively.

Sources of funds to meet debt service requirements are revenues derived from user fees and charges for services recorded in the respective enterprise funds.

Debt Compliance The City believes it is in compliance with all significant limitations and restrictions contained in the limitations and restrictions in the various bond indentures. Legal Debt Limit and Legal Debt Margin As of June 30, 2016, the City’s debt limit (3% of valuation subject to taxation) was $5.83 billion. The total amount of debt applicable to the debt limit was $2.23 billion. The resulting legal debt margin was $3.60 billion.

89 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Arbitrage Under U.S. Treasury Department regulations, all governmental tax-exempt debt issued after August 31, 1986 is subject to arbitrage rebate requirements. The requirements stipulate, in general, that the earnings from the investment of tax-exempt bond proceeds, which exceed related interest expenditures on the bonds, must be remitted to the Federal government on every fifth anniversary of each bond issuance. The City has evaluated each general obligation bond and certificates of participation issued and the Finance Corporation has evaluated each lease revenue bonds. The City and the Finance Corporation do not have rebatable arbitrage liability as of June 30, 2016. Each enterprise fund has performed similar analysis of its debt, which is subject to arbitrage rebate requirements. Any material arbitrage liability related to the debt of the enterprise funds has been recorded as a liability in the respective fund. San Francisco Sustainable Financing The City and County of San Francisco Special Tax District No. 2009-1 (San Francisco Sustainable Financing) was formed in accordance with Ordinance 16-10 to implement the “GreenFinanceSF” program to provide financing for renewable energy, energy efficiency and water efficiency improvements on private or public property in the City. The bonded indebtedness issued by the Special District for the improvement area under the program are payable solely from special taxes levied and collected on property in the improvement area and are not considered obligation of the City. Assessments for the repayment of this debt are received in the Tax Collection Agency Fund. Unpaid assessments constitute fixed liens on the leasehold interest on the parcels within the Special District No. 2009-1.

In October 2012, the City issued $1.4 million Special Tax Bonds Series A for the Area No.1 and in November 2014, the City issued $1.8 million Special Tax Bonds Series A for the Area No.2 of the Special District. As of June 30, 2016, the amount outstanding on the Area No. 1 and No. 2 bonds was $1.3 million and $1.8 million, respectively.

Assessment District In June 1996, the City issued $1.0 million of Limited Obligation Improvement Bonds for the Bayshore Hester Assessment District No. 95-1. These bonds were issued pursuant to the Improvement Bond Act of 1915 to finance the construction of a new public right-of-way and are not considered obligation of the City. The bonds mature from September 1998 through September 2026 bearing interest rates ranging from 6.0% to 6.85%. Assessments collected for repayment of this debt are received in the Tax Collection Agency Fund. Unpaid assessments constitute fixed liens on the lots and parcels assessed within the Bayshore-Hester Assessment District and do not constitute a personal indebtedness of the respective owners of such lots and parcels. As of June 30, 2016, the principal amount of bonds outstanding was $0.6 million.

Mortgage Revenue Bonds The City, through the Mayor’s Office of Housing and Community Development and the former San Francisco Redevelopment Agency has issued various mortgage revenue bonds and community district facility bonds for the financing of multifamily rental housing, below-market rate mortgage for first time homebuyers in order to facilitate affordable housing and the construction and rehabilitation in the City. These obligations have been issued on behalf of various property owners and developers who retain full responsibility for the payment of the debt and are secured by the related mortgage indebtedness and special assessment taxes and are not considered obligations of the City. As of June 30, 2016, the total obligation outstanding was $711.5 million.

90 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Changes in Long-Term Obligations

The changes in long-term obligations for the year ended June 30, 2016, are as follows:

Current Additional Maturities, Amounts Obligations, Retirements, Due July 1, and Net and Net June 30, Within 2015 Increases Decreases 2016 One Year Governmental activities: Bonds payable: General obligation bonds ...... $ 1,881,110 $ 321,875 $ (191,928) $ 2,011,057 $ 120,004 Lease revenue bonds...... 214,850 - (18,795) 196,055 14,025 Certificates of participation ...... 487,215 274,050 (171,685) 589,580 39,075 Subtotal…………………………………………………… 2,583,175 595,925 (382,408) 2,796,692 173,104 Issuance premiums / discounts: Add: unamortized premiums ...... 239,215 32,845 (19,860) 252,200 - Less: unamortized discounts ...... (1,594) - 1,390 (204) - Total bonds payable, net...... 2,820,796 628,770 (400,878) 3,048,688 173,104 Loans...... …… 163,837 - (20,778) 143,059 803 Accrued vacation and sick leave pay...... 149,874 110,753 (109,600) 151,027 85,868 Accrued w orkers' compensation...... 223,684 50,897 (46,756) 227,825 39,357 Estimated claims payable...... 157,660 30,978 (28,140) 160,498 53,627 Governmental activity long-term obligations...... $ 3,515,851 $ 821,398 $ (606,152) $ 3,731,097 $ 352,759

Current Additional Maturities, Amounts Obligations, Retirements, Due July 1, and Net and Net June 30, Within 2015 Increases Decreases 2016 One Year Total Business-type Activities: Bonds payable: Revenue bonds ...... $ 9,551,350 $ 540,475 $ (563,115) $ 9,528,710 $ 265,515 Clean renew able energy bonds……………………… 55,445 4,100 (3,946) 55,599 1,692 Certificates of participation ...... 349,465 - (11,308) 338,157 11,849 Subtotal…………………………………………………… 9,956,260 544,575 (578,369) 9,922,466 279,056 Issuance premiums / discounts: Add: unamortized premiums ...... 440,114 103,525 (43,471) 500,168 - Less: unamortized discounts ...... (601) - 31 (570) - Total bonds payable, net ...... 10,395,773 648,100 (621,809) 10,422,064 279,056 Accreted interest payable………………………………… 5,471 389 - 5,860 - Notes, loans, and other payables...... 2,369 97 (146) 2,320 163 Capital leases ...... 1,174 - (908) 266 266 Accrued vacation and sick leave pay…………………… 104,662 56,756 (52,805) 108,613 64,822 Accrued w orkers' compensation………………………… 171,890 57,863 (40,150) 189,603 31,867 Estimated claims payable…………………..……………. 107,170 37,837 (27,939) 117,068 52,808 Long-term obligations………….…………….….……$ 10,788,509 $ 801,042 $ (743,757) $ 10,845,794 $ 428,982

Internal Service Funds serve primarily the governmental funds, the long-term liabilities of which are included as part of the above totals for governmental activities. Also, for the governmental activities, claims and judgments and compensated absences are generally liquidated by the General Fund.

91 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Annual debt service requirements to maturity for all bonds and loans outstanding as of June 30, 2016 for governmental and business-type activities are as follows:

Governmental Activities (1) Fiscal Year General Obligation Lease Revenue Other Long-Term Ending Bonds Bonds Obligations Total June 30 Principal Interest (2) Principal Interest (3) Principal Interest (4) Principal Interest 2017...... $ 120,004 $ 89,914 $ 14,025 $ 4,973 $ 39,878 $ 26,768 $ 173,907 $ 121,655 2018...... 117,298 83,995 10,880 4,578 155,681 25,315 283,859 113,888 2019...... 117,396 78,362 12,595 4,287 30,905 22,974 160,896 105,623 2020...... 116,436 72,607 6,110 3,999 22,721 21,757 145,267 98,363 2021...... 114,695 66,943 12,740 3,728 23,256 20,747 150,691 91,418 2022-2026.... 618,208 249,785 70,275 13,692 114,440 88,624 802,923 352,101 2027-2031… 603,745 108,004 62,795 5,254 125,813 62,235 792,353 175,493 2032-2036… 203,275 14,189 6,635 777 114,866 33,231 324,776 48,197 2037-2041… - - - - 71,594 15,044 71,594 15,044 2042-2045… - - - - 33,485 3,494 33,485 3,494 Total...... $ 2,011,057 $ 763,799 $ 196,055 $ 41,288 $ 732,639 $ 320,189 $ 2,939,751 $ 1,125,276

Business-Type Activity (1) Clean Renewable Energy Fiscal Year Bonds/ Other Long-Term Ending Revenue Bonds (5) (6) Certificates of Participation (6) Obligations Total June 30 Principal Interest Principal Interest Principal Interest Principal Interest 2017...... $ 265,515 $ 477,197 $ 13,541 $ 21,285 $ 429 $ 147 $ 279,485 $ 498,629 2018...... 279,235 467,033 14,862 20,624 170 97 294,267 487,754 2019...... 309,000 450,632 15,512 19,936 154 90 324,666 470,658 2020...... 344,020 435,602 16,213 19,187 149 82 360,382 454,871 2021...... 364,960 418,833 16,849 18,398 156 76 381,965 437,307 2022-2026.... 1,969,965 1,812,548 89,361 78,920 891 267 2,060,217 1,891,735 2027-2031… 1,759,370 1,318,043 95,447 54,597 637 58 1,855,454 1,372,698 2032-2036… 1,544,180 899,452 48,073 32,539 - - 1,592,253 931,991 2037-2041… 1,708,045 485,640 59,335 16,365 - - 1,767,380 502,005 2042-2046… 844,790 125,742 24,563 2,046 - - 869,353 127,788 2047-2051… 139,630 21,908 - - - - 139,630 21,908 Total...... $ 9,528,710 $ 6,912,630 $ 393,756 $ 283,897 $ 2,586 $ 817 $ 9,925,052 $ 7,197,344

(1) The specific year for payment of estimated claims payable, accrued vacation and sick leave pay and accrued workers’ compensation is not practicable to determine. (2) The interest is before federal subsidy for the General Obligation Bonds Series 2010 C and Series 2010 D. The subsidy is approximately $32.2 million and $6.6 million, respectively, through the year ending 2030. The payment of subsidy by the IRS in fiscal year 2016 was reduced by 6.8% due to federal sequestration. Future interest subsidy may be reduced as well. (3) Includes the Moscone Center Expansion Project Lease Revenue Refunding Bonds Series 2008-1 & 2 which bear interest at a weekly rate. An assumed rate of 0.425%, together with liquidity fee of 0.350% and remarketing fee of 0.0725% were used to project the interest rate payment in this table. (4) The San Francisco County Transportation Authority variable interest rate revolving loan expires on June 8, 2018 and has a rate of interest equal to the sum of 70% of 1-month LIBOR plus 0.30%. An assumed rate of 0.62% was used to project the interest rate payment in this table.

92 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

(5) Debt service for the Airport is per debt service requirement. In the event the letters of credit securing the Airport’s outstanding variable rate bonds had to be withdrawn upon to pay such bonds and the amount drawn had to be repaid by the Airport pursuant to the terms of the related agreement with banks providing such letters of credit, the total interest would be $108.9 million less. (6) The interest payment is before federal subsidy. The federal subsidy for the San Francisco Water Enterprise, San Francisco Wastewater and Hetch Hetchy Water and Power were $472.5 million, $68.0 million and $7.3 million through the fiscal year ending 2051, respectively. The payment of subsidy by the IRS in fiscal year 2016 was reduced by 6.8% due to federal sequestration. Future interest subsidy may be reduced as well.

Governmental Activities Long-term Liabilities

General Obligation Bonds The City issues general obligation bonds to provide funds for the acquisition or improvement of real property and construction of affordable housing. General obligation bonds have been issued for both governmental and business-type activities. The net authorized and unissued governmental activities general obligation bonds for the fiscal year ended June 30, 2016, are as follows:

Governmental Activities - General Obligation Bonds Authorized and unissued as of June 30, 2015...... $ 1,285,100 Increases in authorization this fiscal year: Affordable Housing ..……………………………………….…………………..…… 310,000 Public Health and Safety ……………………………………..……………….……… 350,000 Bonds issued: Series 2015B Transportation and Road Improvements………………………… (67,005) Series 2015A Seismic Safety Loan Program…………………………………… (24,000) Series 2016A Clean and Safe Neighborhood Parks….………………………… (8,695) Series 2016B Clean and Safe Neighborhood Parks…………………………… (43,220) Series 2016C Earthquake Safety and Emergency Response ………………… (25,215) Series 2016D Earthquake Safety and Emergency Response ………………… (109,595) Series 2016E Road Repaving and Street Safety………………………………… (44,145) Net authorized and unissued as of June 30, 2016...... $ 1,623,225

The increase in authorized amount of $310.0 million of Affordable Housing and $350.0 million of Public Health and Safety General Obligation Bonds was approved by at least two-third votes on Proposition A at an election held on November 3, 2015 and June 7, 2016, respectively. The proceeds of the Affordable Housing bonds will be used to finance the City’s various affordable housing programs. The Public Health and Safety bonds will finance the acquisition and improvement of facilities for emergency response and safety, health care and homeless services.

In July 2015, the City issued Transportation and Road Improvement General Obligation Bonds Series 2015B in the amount of $67.0 million with interest rates ranging from 2.0% to 5.0% and maturity from June 2016 through June 2035. The proceeds of the Series 2015B will be used to finance the improvements to the City’s transportation system, streets and roads and to pay certain costs related to the issuance of the Series 2015B.

In August 2015, the City issued Seismic Safety Loan Program General Obligation Bonds Series 2015A in the amount of $24.0 million to provide funds for loans for the seismic strengthening of privately- owned unreinforced masonry buildings within the City and to pay for the costs of issuance of the Series 2015A bonds. On the date of issuance, the Series 2015A shall be Index Rate Bonds and bear interest at the LIBOR Index Rate; provided that from the date of issuance to but not including the first business day of the next succeeding month, the Series 2015A shall bear interest at the rate as set in the Declaration of Trust. The initial index rate period shall commence on and be effective from the date of

93 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands) issuance of the Series 2015A and shall continue through the end of the initial period. The index rate shall be determined in accordance with the Declaration of Trust. At the option of the City, the interest rate with respect to all (but not less than all) Series 2015A may be (a) on any LIBOR Index Reset Date, converted from an Index Rate to a new Index Rate or (2) converted to a Fixed Rate, in each case in accordance with the Declaration of Trust. The Series 2015A will mature from June 2019 through June 2035.

In February 2016, the City issued Clean and Safe Neighborhood Parks General Obligation Bonds Series 2016A and 2016B in the amount of $8.7 million and $43.2 million, respectively. The proceeds of the Series 2016A and 2016B bonds will be used to finance improvements to park, open space and recreational facilities and to pay certain costs related to the issuance of the Series 2016A and 2016B bonds. Interest rates on both series range from 2.0% to 5.0% with principal amortizing from June 2016 through June 2035.

In April 2016, the City issued General Obligation Bonds Earthquake Safety and Emergency Response Series 2016C in the amount of $25.2 million, Earthquake Safety and Emergency Response Series 2016D in the amount of $109.6 million and Road Repaving and Street Safety Series 2016E in the amount of $44.1 million. The Series 2016C, 2016D and 2016E bonds bear rates ranging from 2.25% to 5.0% with principal amortizing from June 2016 through June 2035. The proceeds of the Series 2016C and 2016D bonds will be used to finance improvements to earthquake safety and emergency responsiveness facilities and infrastructure and to pay certain costs related to the issuance of the Series 2016C and 2016D bonds. The proceeds of the Series 2016E bonds will be used to finance the repaving and reconstruction of various roads; the rehabilitation and seismic improvement of street structures; the replacement of sidewalks; the installation and renovation of curb ramps; the redesign of streetscapes to include pedestrian and bicycle safety improvements; and the construction, rehabilitation and renovation of traffic infrastructure within the City and to pay certain costs related to the issuance of the Series 2016E bonds.

The debt service payments on the general obligation bonds are funded through ad valorem taxes on property.

Certificates of Participation

In July 2015, the City issued Certificates of Participation (War Memorial Veterans Building Seismic Upgrade and Improvements) Series 2015A and Series 2015B (the “Series 2015AB”) for $112.1 million and $22.2 million respectively. The Series 2015AB were sold to provide funds to: 1) finance or refinance the costs of the seismic retrofit, construction, reconstruction, installation, equipping, improvement or rehabilitation of the War Memorial Veterans Building and related property owned by the City and located at 401 Van Ness Avenue, San Francisco; 2) fund capitalized interest payable with respect to the Series 2015AB through September 2015; 3) fund the 2015 Reserve Account of the Reserve Fund established under the Trust Agreement for the Series 2015AB; and 4) to pay costs of the execution and delivery of the Series 2015AB. The Series 2015A bears interest rates ranging from 4.0% to 5.0% with principal amortizing from April 2023 through April 2045. The Series 2015B bears interest rates ranging from 2.0% to 4.0% with principal amortizing from April 2016 through April 2024.

In October 2015, the City issued Refunding Certificates of Participation Series 2015-R1 (City Office Buildings-Multiple Properties Project) (the “Series 2015-R1”) for $123.6 million to prepay a portion of certain outstanding certificates of participation the proceeds of which financed the acquisition of and capital improvements to certain office buildings occupied by various City departments or certain tenants which are qualified as non-profit organizations exempt from Federal income taxes pursuant to Section 501 (c)(3) of the Code (“501(c)(3) Tenants”); fund a debt service reserve for the Series 2015-R1; and pay costs of execution and delivery of the Series 2015-R1. The Series 2015-R1 matures from September 2016 through September 2040 with interest rate ranging from of 4.0% to 5.0%. The refunding resulted in the recognition of deferred accounting loss of $1.4 million and reduced the City’s

94 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands) aggregate debt service payment by $18.1 million over the next 25 years and obtained net present value savings of $11.9 million or 9.0% of refunded bond.

In June 2016, the City issued Certificates of Participation, (War Memorial Veterans Building Seismic Upgrade and Improvements) Series 2016A (the “Series 2016A”) for $16.1 million to provide funds to: 1) reimburse the City for certain costs of the seismic retrofit, construction reconstruction, installation, equipping, improvement or rehabilitation of the War Memorial Veterans Building and related property owned by the City and located at 401 Van Ness Avenue, San Francisco; 2) fund the 2016 Reserve Account of the Reserve Fund established under the Trust Agreement for the Series 2016A; and 3) pay costs of the execution and delivery of the Series 2016A. The Series 2016A were issued with interest rates ranging from 1.096% to 3.771% and matures from April 2017 through April 2032.

At June 30, 2016, the City has a total of $589.6 million of certificates of participation payable by pledged revenues from the base rental payments payable by the City. Total debt service payments remaining on the certificates of participation are $888.2 million payable through April 1, 2045. For the fiscal year ended June 30, 2016, principal and interest paid by the City totaled $39.8 million and $25.3 million, respectively.

Lease Revenue Bonds The changes in authorized and unissued lease revenue bonds -- governmental activities for the year ended June 30, 2016 were as follows:

Authorized and unissued as of June 30, 2015...... $ 164,432 Increase in authorization in this fiscal year: Current year annual increase in Finance Corporation's equipment program. 3,225 Current year maturities in Finance Corporation's equipment program...... 7,725 Net authorized and unissued as of June 30, 2016...... $ 175,382

Finance Corporation The purpose of the Finance Corporation is to provide a means to publicly finance, through lease financings, the acquisition, construction and installation of facilities, equipment and other tangible real and personal property for the City’s general governmental purposes.

The Finance Corporation uses lease revenue bonds to finance the purchase or construction of property and equipment, which are in turn leased to the City under the terms of an Indenture and Equipment Lease Agreement. These assets are then recorded in the basic financial statements of the City. Since the sole purpose of the bond proceeds is to provide lease financing to the City, any amount that is not applied towards the acquisition or construction of real and personal property such as unapplied acquisition fund, bond issue costs, fund withheld pursuant to reserve fund requirement, and amount designated for capitalized interest is recorded as unearned revenues in the internal service fund until such time as it is used for its intended purpose. The unearned amounts are eliminated in the governmental activities statement of net position.

The lease revenue bonds are payable by pledged revenues from the base rental payments payable by the City, pursuant to a Master Lease Agreement between the City and the San Francisco Finance Corporation for the use of equipment and facilities acquired, constructed and improved by the Finance Corporation. The total debt service requirement remaining on the lease revenue bonds is $237.3 million payable through June 2034. For the fiscal year ended June 30, 2016, principal and interest paid by the Corporation in the form of lease payments made by the City totaled $18.8 million and $4.7 million, respectively.

95 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Equipment Lease Program - In the June 5, 1990 election, the voters of the City approved Proposition C, which amended the City Charter to allow the City to lease-purchase up to $20.0 million of equipment through a non-profit corporation using tax-exempt obligations. Beginning July 1, 1991, the Finance Corporation was authorized to issue lease revenue bonds up to $20.0 million in aggregate principal amount outstanding plus 5% annual adjustment each July 1. As of June 30, 2016, the amount authorized and outstanding was $67.7 million, and $6.5 million, respectively.

San Francisco County Transportation Authority Revolving Credit Agreement

In June 2015, the Transportation Authority substituted its $200.0 million commercial paper notes (Limited Tax Bonds), Series A and B with a $140.0 million tax-exempt revolving credit agreement (Revolving Credit Agreement). The commercial paper notes provided a source of financing for the Transportation Authority’s voter-approved Proposition K Expenditure Plan. The Revolving Credit Agreement expires on June 8, 2018 and has a rate of interest equal to the sum of 70% of 1-month LIBOR plus 0.30%. The interest payments are due the first business day of each month and the outstanding principal payment is required to be paid at the end of the agreement June 8, 2018. The Revolving Credit Agreement is secured by a first lien gross pledge of the Transportation Authority’s sales tax. The Transportation Authority paid $20.0 million of the outstanding balance of $134.7 million as of July 1, 2015. Annual principal and interest payments were $20.8 million in FY2015-16 and pledged revenues were $99.5 million for the year ended June 30, 2016. As of June 30, 2016, $114.7 million of the Revolving Credit Agreement balance was outstanding, with an interest rate of 0.62%.

Business-Type Activities Long-Term Liabilities

The following provides a brief description of the current year additions to the long-term debt of the business-type activities.

San Francisco International Airport Second Series Revenue Bonds (Capital Plan Bonds)

Pursuant to resolutions approved in fiscal years 2008, 2012, 2014 and 2016, the Airport has authorized the issuance of up to $5.0 billion of San Francisco International Airport Second Series Revenue Bonds to finance and refinance the construction, acquisition, equipping, and development of capital projects undertaken by the Airport, including retiring all or a portion of the Airport’s outstanding subordinate commercial paper notes (CP) issued for capital projects, funding debt service reserves, and for paying costs of issuance. As of June 30, 2016, $3.4 billion of the authorized capital plan bonds remained unissued.

In September 2015, the Airport authorized the issuance of an additional $243.0 million of San Francisco International Airport Second Series Revenue Bonds (Capital Plan Bonds) and $225.0 million of San Francisco International Airport Hotel Special Facility Revenue Bonds to finance the development and construction of a new Airport-owned hotel and related AirTrain station. The Airport also designated the planned hotel as a “special facility” under the 1991 Master Resolution, which will allow the hotel revenues to be segregated from the Airport’s other revenues and used to pay hotel operating expenses and debt service on the Hotel Special Facility Bonds. In order to obtain the lowest cost of financing, the Airport does not plan to sell the Hotel Special Facility Bonds to investors, but will purchase them itself with a portion of the proceeds of the Capital Plan Bonds, which will be sold to investors. The total net proceeds of the two bond issuances are expected to be approximately $243.0 million, which will be applied to the $225.0 million construction costs of the hotel and AirTrain station, capitalized interest and other costs of issuance. In December 2015, the City’s Board of Supervisors authorized the issuance of such Hotel Special Facility Bonds and Capital Plan Bonds for the hotel and AirTrain station. Airport approval of the bond sale is required before such bonds can be issued.

96 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Second Series Revenue Refunding Bonds

Pursuant to sale resolutions approved between fiscal years 2005 through 2016, the Airport has authorized the issuance of up to $8.4 billion of San Francisco International Airport Second Series Revenue Refunding Bonds for the purposes of refunding outstanding 1991 Resolution Bonds and outstanding subordinate CP notes, funding debt service reserves, and paying costs of issuance, including any related bond redemption premiums. In February 2016, the Airport issued its Second Series Revenue Refunding Bonds, Series 2016A (Non-AMT/Governmental Purpose), in the principal amount of $232.1 million to refund $66.5 million of its Issue 32F, $155.3 million of its Issue 32G and $63.1 million of its Issue 34D long-term fixed rate bonds for debt service savings. As of June 30, 2016, net of expired sale authorizations, $1.2 billion of such refunding bonds remained authorized but unissued. Variable Rate Demand Bonds

As of June 30, 2016, the Airport had outstanding aggregate principal amount of $477.9 million of Second Series Variable Rate Revenue Refunding Bonds, consisting of Issue 36A/B/C and Issue 37C, and Series 2010A (collectively, the “Variable Rate Bonds”), with final maturity dates of May 1, 2026 (Issue 36A/B/C), May 1, 2029 (Issue 37C), and May 1, 2030 (Series 2010A). The Variable Rate Bonds are long-term, tax-exempt bonds that currently bear interest at a rate that is adjusted weekly, and that are subject to tender at par at the option of the holder thereof on seven days’ notice. Any tendered Variable Rate Bonds are remarketed by the applicable remarketing agent in the secondary market to other investors. The interest rate on the Variable Rate Bonds can be converted to other interest rate modes, including a term rate or fixed rates to maturity, upon appropriate notice by the Airport. The scheduled payment of the principal and purchase price of and interest on the Variable Rate Bonds is secured by separate irrevocable LOC issued to the Senior Trustee for the benefit of the applicable bondholders by the banks identified in the tables below. Amounts drawn under a LOC that are not reimbursed by the Airport constitute “Repayment Obligations” under the 1991 Master Resolution and are accorded the status of other outstanding bonds to the extent provided in the Resolution. The commitment fees for the LOC range between 0.45% and 0.63% per annum. As of June 30, 2016, there were no unreimbursed draws under these facilities.

In June 2016, the Airport closed a new irrevocable LOC issued by Wells Fargo Bank, National Association, supporting the Second Series Variable Rate Revenue Refunding Bonds, Issue 36A. The LOC will expire June 29, 2018. In June 2016, the Airport closed a new irrevocable LOC issued by Bank of America, N.A., supporting the Second Series Variable Rate Revenue Refunding Bonds Series 2010A. The LOC expires June 29, 2020. The LOC securing the Variable Rate Bonds included in long- term debt as of June 30, 2016, are as follows:

Variable rate bonds Issue 36A Issue 36B Issue 36C Issue 37C Series 2010A Principal Amount$ 100,000 $ 40,620 $ 36,145 $ 88,650 $ 212,475 Expiration Date June 29, 2018 April 25, 2018 April 25, 2018 January 28, 2019 June 29, 2020 Credit Provider Wells Fargo (1) BTMU (2) BTMU (2) MUFG Union Bank (3) Bank of America (4)

(1) Wells Fargo Bank, National Association (2) The Bank of Tokyo-Mitsubishi UFJ, Ltd. (3) Formerly Union Bank, N.A. (4) Bank of America, National Association

97 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Interest Rate Swaps

Objective and Terms – In December 2004, the Airport entered into seven forward starting interest rate swaps (the 2004 swaps) with an aggregate notional amount of $405.0 million, in connection with the anticipated issuance of Second Series Variable Rate Revenue Refunding Bonds, Issue 32A-E in February 2005, and Second Series Variable Rate Revenue Refunding Bonds, Issue 33 in February 2006. The swap structure was intended as a means to increase the Airport’s debt service savings when compared with fixed rate refunding bonds at the time of issuance. The expiration date of the 2004 swaps is May 1, 2026.

In July 2007, the Airport entered into four additional forward starting interest rate swaps in connection with the anticipated issuance of its Second Series Variable Rate Revenue Refunding Bonds, Issue 37B/C, in May 2008 (the 2007 swaps), and Second Series Variable Rate Revenue Refunding Bonds, Series 2010A, in February 2010 (the 2010 swaps). The expiration dates of the 2007 and 2010 swaps are May 1, 2029 and 2030, respectively. In the spring of 2008, the Airport refunded several issues of auction rate and variable rate bonds, including Issue 32 and Issue 33. The 2004 swaps associated with these issues then became associated with the Second Series Variable Rate Revenue Refunding Bonds, Issues 36A-D, and Issue 37A. Subsequently, in October 2008 and December 2008, the Airport refunded Issue 37A and Issue 37B, respectively. Concurrently with the refunding of Issue 37A, the three associated swaps with an aggregate notional amount of $205.1 million were terminated. The swap associated with Issue 37B was not terminated upon the refunding of Issue 37B.

In December 2010, the Airport terminated a swap associated with the Series 2010A-3 Bonds, with a notional amount of $72.0 million. The Airport paid a termination amount of $6.7 million to the counterparty, Depfa Bank plc. The payment was funded with taxable CP, which was subsequently retired with Airport operating funds in March 2011. Following the termination of the Depfa swap, the Series 2010A-3 Bonds, which are variable rate, were no longer hedged with an interest rate swap. The swap associated with the Issue 37B Bonds, however, is now associated with the Series 2010A-3 Bonds.

In September 2011, the Airport refunded the Issue 36D Bonds with proceeds of the San Francisco International Airport Second Series Revenue Bonds, Series 2011H and terminated the swap associated with Issue 36D, which had an initial notional amount of $30.0 million and JP Morgan Chase Bank, N.A. as counterparty. The Airport paid a termination fee of $4.6 million to the counterparty. Under the 2004 swaps, the Airport receives a monthly variable rate payment from each counterparty equal to 63.50% of USD-LIBOR-BBA plus 0.29%. Under the 2007 and 2010 swaps, the Airport receives 61.85% of USD-LIBOR-BBA plus 0.34%. These payments are intended to approximate the variable interest rates on the bonds originally hedged by the swaps. The Airport makes a monthly fixed rate payment to the counterparties as set forth below which commenced on the date of issuance of the related bonds. The objective of the swaps is to achieve a synthetic fixed rate with respect to the hedged bonds. All of the outstanding interest rate swaps are terminable at their market value at any time solely at the option of the Airport.

98 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

As of June 30, 2016, the Airport’s derivative instruments comprised six interest rate swaps that the Airport entered into to hedge the interest payments on several series of its variable rate Second Series Revenue Bonds. The Airport determined the hedging relationship between the variable rate bonds and the related interest rate swaps to be effective as of June 30, 2016.

Initial Notional Notional Amount # Current Bonds Amount June 30, 2016 Effective Date 1 36AB$ 70,000 $ 70,000 2/10/2005 2 36AB 69,930 69,930 2/10/2005 3 36C 30,000 30,000 2/10/2005 4 2010A (37B)* 79,684 79,684 5/15/2008 5 37C 89,856 88,616 5/15/2008 6 2010A** 143,947 142,383 2/1/2010 Total$ 483,417 $ 480,613

* The Issue 37B Bonds that are hedged by this swap agreement were purchased with proceeds of the Series 2008B Notes, which the Airport subsequently refunded, and the Issue 37B Bonds are held in trust. The swap is now indirectly hedging the Series 2010A-3 Bonds for accounting purposes. ** Hedges Series 2010-1 and 2010A-2. Fair Value The fair values take into consideration the prevailing interest rate environment and the specific terms and conditions of each swap. All values were estimated using the zero-coupon discounting method. This method calculates the future payments required by the swap, assuming that the current forward rates implied by the yield curve are the market’s best estimate of future spot interest rates. These payments are then discounted using the spot rates implied by the current yield curve for a hypothetical zero-coupon rate bond due on the date of each future net settlement payment on the swaps to arrive at the so-called “settlement amount”, i.e. the approximate amount a party would have to pay or would receive if the swap was terminated.

In addition, pursuant to GASB Statement No. 72, the settlement amounts are then adjusted for the nonperformance risk of each party to the swap to arrive at the fair value. For each swap, the nonperformance risk was computed as the total cost of the transactions required to hedge the default exposure, i.e., a series of European swaptions, exercisable on each of the future payment exchange dates under the swap that are structured to reverse the remaining future cash flow obligations as of such dates, adjusted by probability of default on each future date. Default probabilities were derived from recovery rate adjusted credit default swap quotes or generic ratings based borrowing curves that fall into Level 2 of the GASB Statement No. 72 fair value hierarchy.

99 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

As of June 30, 2016, the fair value of the Airport’s six outstanding swaps, counterparty credit ratings, and fixed rate payable by the Airport are as follows:

Counterparty Fixed Rate credit ratings Payable by Fair Value to # Current Bonds Counterparty/guarantor* (S&P/Moody's/Fitch) Airport Airport 136AB J.P. Morgan Chase Bank, N.A. A+/Aa3/AA‐ 3.444%$ (8,963) 236AB J.P. Morgan Chase Bank, N.A. A+/Aa3/AA‐ 3.445% (8,965) 336C J.P. Morgan Chase Bank, N.A. A+/Aa3/AA‐ 3.444% (3,842) 4 2010A (37B)** Merrill Lynch Capital Services, Inc./ Merrill Lynch Derivative Products AG AA‐/Aa3/NR* 3.773% (17,705) 537C J.P. Morgan Chase Bank, N.A. A+/Aa3/AA‐ 3.898% (20,588) 6 2010A*** Goldman Sachs Bank USA/ Goldman Sachs Group, Inc. BBB+/A3/A* 3.925% (36,069) $ (96,132) * Reflects ratings of the guarantor. ** The issue 37B Bonds that are hedged by this swap agreement were purchased with proceeds of the Series 2008B Notes, which the Airport subsequently refunded, and the Issue 37B are held in trust. The swap is now indirectly hedging the Series 2010A‐3 Bonds for accounting purpose *** Hedges Series 2010A ‐ 1 and 2010A ‐ 2.

Fair Value Hierarchy Fair Value Measurement Using Significant Other Fair Value Observable Inputs 6/30/2016 (Level 2) Interest rate swaps$ (96,132) $ (96,132) The impact of the interest rate swaps on the financial statements for the fiscal year ended June 30, 2016 is as follows:

Deferred outflows on Derivative derivative instruments instruments Balance as of June 30, 2015 (as restated)$ 65,408 $ 79,321 Change in fair value to year end 18,206 16,811 Balance as of June 30, 2016$ 83,614 $ 96,132

The fair value of the interest rate swap portfolio is recorded as a liability (since the Airport would owe a termination payment to the counterparty) in the statements of net position. Unless a swap was determined to be an off-market swap at the inception of its hedging relationship, the fair value of the swap is recorded as a deferred outflow asset (if a termination payment would be due to the counterparty) or inflow liability (if a termination payment would be due to the Airport). The off-market portions of the Airport’s swaps are recorded as carrying costs with respect to various refunded bond issues. Unlike fair value and deferred inflow/outflow values, the balance of remaining off-market portions are valued on a present value, or fixed yield, to maturity basis. The difference between the deferred outflows and derivative instruments presented in the table above constitutes the unamortized off-market portions of the swaps as of June 30, 2016.

100 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Basis Risk – The Airport has chosen a variable rate index based on a percentage of London Interbank Offered Rate (LIBOR) plus a spread, which historically has closely approximated the variable rates payable on the related bonds. However, the Airport is subject to the risk that a change in the relationship between the LIBOR-based swap rate and the variable bond rates would cause a material mismatch between the two rates. Changes that cause the payments received from the counterparty to be insufficient to make the payments due on the associated bonds result in an increase in the synthetic interest rate on the bonds, while changes that cause the counterparty payments to exceed the payments due on the associated bonds result in a decrease in the synthetic interest rate on the bonds. During the fiscal year ended June 30, 2016, the Airport paid a total of $2.0 million less in interest on its variable rate bonds than the floating-rate payments it received from the swap counterparties, resulting in a decrease in the effective synthetic interest rates on the associated bonds.

Credit Risk – As of June 30, 2016, the Airport is not exposed to credit risk because the swaps have a negative fair value to the Airport. Should long-term interest rates rise and the fair value of the swaps become positive, the Airport would be exposed to credit risk in the amount of the swaps’ fair value. Under the terms of the swaps, counterparties are required to post collateral consisting of specified U.S. Treasury and Agency securities in an amount equal to the market value of a swap that exceeds specified thresholds linked to the counterparty’s credit ratings. Any such collateral will be held by a custodial bank.

Counterparty Risk – The Airport is exposed to counterparty risk, which is related to credit and termination risk. While the insolvency or bankruptcy of a counterparty, or its failure to perform would be a default under the applicable swap documents, none of the Airport’s swaps would automatically terminate. Rather, the Airport would have the option to terminate the affected swap at its fair value, which may result in a payment to the counterparty. The Airport may also be exposed to counterparty risk in a high interest rate environment in the event a counterparty is unable to perform its obligations on a swap transaction leaving the Airport exposed to the variable rates on the associated debt. In order to diversify the Airport’s swap counterparty credit risk and to limit the Airport’s credit exposure to any one counterparty, the Airport’s swap policy imposes limits on the maximum net termination exposure to any one counterparty. Maximum net termination exposure is calculated as of the date of execution of each swap and is monitored regularly during the term of the swap. The exposure limits vary for collateralized and non-collateralized swaps based upon the credit rating of the counterparty. If any exposure limit is exceeded by a counterparty during the term of a swap, the Airport Director is required to consult with the Airport’s swap advisor and bond counsel regarding appropriate actions to take, if any, to mitigate such increased exposure, including, without limitation, transfer or substitution of a swap. As of June 30, 2016, the fair value of the Airport’s swaps was negative to the Airport (representing an amount payable by the Airport to each counterparty in the event the relevant swap was terminated).

Termination Risk – All of the interest rate swaps are terminable at their market value at any time at the option of the Airport. The Airport has limited termination risk with respect to the interest rate swaps. That risk would arise primarily from certain credit-related events or events of default on the part of the Airport, the municipal swap insurer, or the counterparty.

The Airport has secured municipal swap insurance for all its regular payments and some termination payments due under all its interest rate swaps, except the swaps associated with the Series 2010A Bonds, from the following insurers: Insurer Credit Ratings June 30, 2016 # Swap Swap Insurer (S&P/Moody’s/Fitch) 1 Issue 36AB FGIC/National Public Finance Guarantee Corporation AA-/A3/NR 2 Issue 36AB FGIC/National Public Finance Guarantee Corporation AA-/A3/NR 3 Issue 36C Assured Guaranty Municipal Corp. AA/A2/NR 4 Series 2010A None N/A 5 Issue 37C Assured Guaranty Municipal Corp. AA/A2/NR 6 Series 2010A None N/A

101 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

If the Airport is rated between Baa1/BBB+/BBB+ and Baa3/BBB-/BBB- (Moody’s/S&P/Fitch), and the applicable bond insurer is rated below A3/A- (Moody’s/S&P), the counterparties may terminate the swaps and require the Airport to pay the termination value, if any, unless the Airport chooses to provide suitable replacement credit enhancement, assign the Airport’s interest in the swaps to a suitable replacement counterparty, or post collateral to secure the swap termination value. If the Airport is rated below Baa3/BBB-/BBB- (Moody’s/S&P/Fitch) or its ratings are withdrawn or suspended, and the applicable bond insurer is rated below A3/A- (Moody’s/S&P), the counterparties may terminate the swaps and require the Airport to pay the termination value, if any. With respect to the Series 2010A swaps with no swap insurance, the counterparty termination provisions and the Airport rating thresholds are the same as described above.

Additional Termination Events under the swap documents with respect to the Airport include an insurer payment default under the applicable swap insurance policy, and certain insurer rating downgrades or specified insurer nonpayment defaults combined with a termination event or event of default on the part of the Airport or a ratings downgrade of the Airport below investment grade. Additional Termination Events under the swap documents with respect to a counterparty or its guarantor include a rating downgrade below A3/A1/A1 (Moody’s/S&P/Fitch), followed by a failure of the counterparty to assign its rights and obligations under the swap documents to another entity acceptable to the applicable insurer within 15 business days.

Goldman Sachs Group, Inc., which is the guarantor of the Airport’s swap counterparty Goldman Sachs Bank USA, was downgraded to BBB+ by S&P during the year ended June 30, 2016.

Merrill Lynch Derivative Products AG, which is the guarantor of the Airport’s swap counterparty Merrill Lynch Capital Services, Inc., was upgraded by one or more of the rating agencies during the year ended June 30, 2016.

The downgrade of any swap counterparty increases the risk to the Airport that such counterparty may become bankrupt or insolvent and not perform under the applicable swap. If a counterparty does not perform under its swap, the Airport may be required to continue making its fixed rate payments to the counterparty even though it does not receive a variable rate payment in return. The Airport may elect to terminate a swap with a non-performing counterparty and may be required to pay a substantial termination payment approximately equal to the fair value of such swap, depending on market conditions at the time. As of June 30, 2016, the fair value of each swap was negative to the Airport as shown above.

San Francisco Wastewater Enterprise

In May 2016, the San Francisco Wastewater Enterprise issued tax-exempt revenue bonds 2016 Series A (Green Bonds) in the amount of $240.6 million with interest rates ranging from 4.0% to 5.0%. Proceeds from the bonds were used for Wastewater capital projects, to pay off $53.4 million of outstanding commercial paper notes, to fund capitalized interest, and pay the costs of issuing the bonds. The bonds carried ratings of “AA” and “Aa3” from S&P and Moody’s, respectively and mature through October 1, 2046. The bonds have a true interest cost of 3.2%. As of June 30, 2016, the principal amount outstanding of the 2016 Series A bonds was $240.6 million. Also in May 2016, the Wastewater Enterprise issued tax-exempt revenue bonds 2016 Series B in the amount of $67.8 million with interest rates ranging from 4.0% to 5.0%. Proceeds from the bonds were used for Wastewater capital projects, to pay off $20.6 million of outstanding commercial paper notes, to fund capitalized interest, and pay the costs of issuing the bonds. The bonds carried ratings of “AA” and “Aa3” from S&P and Moody’s, respectively and mature through October 1, 2046. The bonds have a true interest cost of 3.2%. As of June 30, 2016, the principal amount outstanding of the 2016 Series B bonds was $67.8 million.

102 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Hetch Hetchy Water and Power

In October 2015, Hetch Hetchy Power issued $4.1 million of taxable 2015 New Clean Renewable Energy Bonds (NCREB). The NCREB were issued to fund certain qualified clean, renewable energy solar generation facilities at the Marina Middle School and the San Francisco Police Academy. The 2015 NCREBs were non-rated and privately-placed with Bank of America Leasing. The NCREB bears interest rate of 4.62%, with net effective interest rate of 1.4% after the federal tax subsidy and matures through fiscal year 2033.

(9) EMPLOYEE BENEFIT PROGRAMS

(a) Retirement Plans General Information About the Pension Plans – The San Francisco City and County Employees’ Retirement System (Retirement System) administers a cost-sharing multiple-employer defined benefit pension plan (SFERS Plan), which covers substantially all of the employees of the City and County of San Francisco, and certain classified and certificated employees of the San Francisco Community College and Unified School Districts, and San Francisco Trial Court employees other than judges. The San Francisco City and County Charter and the Administrative Code are the authority which establishes and amends the benefit provisions and employer obligations of the SFERS Plan. The Retirement System issues a publicly available financial report that includes financial statements and required supplementary information for the SFERS Plan. That report may be obtained by writing to the San Francisco City and County Employees’ Retirement System, 1145 Market Street, 5th Floor, San Francisco, CA 94103 or by calling (415) 487-7000.

In addition, some City employees are eligible to participate in the Public Employees’ Retirement Fund (PERF) of the California Public Employees’ Retirement System (CalPERS) Safety Plan, an agent multi- employer pension plan, or the CalPERS Miscellaneous Plan, a cost-sharing multiple-employer pension plan. Some employees of the Transportation Authority, a blended component unit, are eligible to participate in a CalPERS Miscellaneous Plan or a CalPERS PEPRA Miscellaneous Plan, both are cost- sharing multiple-employer pension plans. In addition, some employees of the Successor Agency, a fiduciary component unit, are eligible to participate in a CalPERS Miscellaneous Plan or a CalPERS PEPRA Miscellaneous Plan, both are cost-sharing multiple-employer pension plans. Lastly, some employees of the Treasure Island Development Authority, a discretely presented component unit, are eligible to participate in the CalPERS Miscellaneous cost-sharing multiple-employer pension plan.

CalPERS acts as a common investment and administrative agent for various local and state governmental agencies within the State of California. Benefit provisions and other requirements are established by State statute, employer contract with CalPERS and by City resolution. CalPERS issues publicly available reports that include a full description of the pension plans regarding benefit provisions, assumptions and membership information that can be found on the CalPERS website at www.calpers.ca.gov.

103 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Benefits

SFERS – The SFERS Plan provides service retirement, disability, and death benefits based on specified percentages of defined final average monthly salary and provides annual cost-of-living adjustments (COLA) after retirement. The SFERS Plan also provides pension continuation benefits to qualified survivors. The Retirement System pays benefits according to the category of employment and the type of benefit coverage provided by the City. The four main categories of SFERS Plan members are:

 Miscellaneous Non-Safety Members – staff, operational, supervisory, and all other eligible employees who are not in special membership categories.  Sheriff’s Department and Miscellaneous Safety Members – sheriffs assuming office on and after January 7, 2012, and undersheriffs, deputized personnel of the Sheriff’s Department, and miscellaneous safety employees hired on and after January 7, 2012.  Firefighter Members – firefighters and other employees whose principal duties are in fire prevention and suppression work or who occupy positions designated by law as firefighter member positions.  Police Members – police officers and other employees whose principal duties are in active law enforcement or who occupy positions designated by law as police member positions.

The membership groups and the related service retirement benefits are summarized as follows:

Miscellaneous Non-Safety Members who became members prior to July 1, 2010 qualify for a service retirement benefit if they are at least 50 years old and have at least 20 years of credited service or if they are at least 60 years old and have at least 10 years of credited service. The service retirement benefit is calculated using the member’s final compensation (highest one-year average monthly compensation) multiplied by the member’s years of credited service times the member’s age factor up to a maximum of 75% of the member’s final compensation.

Miscellaneous Non-Safety Members who became members on or after July 1, 2010 and prior to January 7, 2012 qualify for a service retirement benefit if they are at least 50 years old and have at least 20 years of credited service or if they are at least 60 years old and have at least 10 years of credited service. The service retirement benefit is calculated using the member’s final compensation (highest two-year average monthly compensation) multiplied by the member’s years of credited service times the member’s age factor up to a maximum of 75% of the member’s final compensation.

Miscellaneous Non-Safety Members who became members on or after January 7, 2012 qualify for a service retirement benefit if they are at least 53 years old and have at least 20 years of credited service or if they are at least 60 years old and have at least 10 years of credited service. The service retirement benefit is calculated using the member’s final compensation (highest three-year average monthly compensation) multiplied by the member’s years of credited service times the member’s age factor up to a maximum of 75% of the member’s final compensation.

Sheriff’s Department Members and Miscellaneous Safety Members who were hired on or after January 7, 2012 qualify for a service retirement benefit if they are at least 50 years old and have at least 5 years of credited service. The service retirement benefit is calculated using the member’s final compensation (highest three-year average monthly compensation) multiplied by the member’s years of credited service times the member’s age factor up to a maximum of 90% of the member’s final compensation.

104 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Firefighter Members and Police Members who became members before November 2, 1976 qualify for a service retirement benefit if they are at least 50 years old and have at least 25 years of credited service. The service retirement benefit is calculated using the member’s final compensation (monthly salary earnable at the rank or position the member held for at least one year immediately prior to retiring) multiplied by the member’s years of credited service times the member’s age factor up to a maximum of 90% of the member’s final compensation.

Firefighter Members and Police Members who became members on or after November 2, 1976 and prior to July 1, 2010 qualify for a service retirement benefit if they are at least 50 years old and have at least 5 years of credited service. The service retirement benefit is calculated using the member’s final compensation (highest one-year average monthly compensation) multiplied by the member’s years of credited service times the member’s age factor up to a maximum of 90% of the member’s final compensation.

Firefighter Members and Police Members who became members on or after July 1, 2010 and prior to January 7, 2012 qualify for a service retirement benefit if they are at least 50 years old and have at least 5 years of credited service. The service retirement benefit is calculated using the member’s final compensation (highest two-year average monthly compensation) multiplied by the member’s years of credited service times the member’s age factor up to a maximum of 90% of the member’s final compensation.

Firefighter Members and Police Members who became members on or after January 7, 2012 qualify for a service retirement benefit if they are at least 50 years old and have at least 5 years of credited service. The service retirement benefit is calculated using the member’s final compensation (highest three-year average monthly compensation) multiplied by the member’s years of credited service times the member’s age factor up to a maximum of 90% of the member’s final compensation.

All members are eligible to apply for a disability retirement benefit, regardless of age, when they have 10 or more years of credited service and they sustain an injury or illness that prevents them from performing their duties. Safety members are eligible to apply for an industrial disability retirement benefit from their first day on the job if their disability is caused by an illness or injury that they receive while performing their duties.

All retired members receive a benefit adjustment each July 1, which is the Basic COLA. The majority of adjustments are determined by changes in CPI with increases capped at 2%. Effective July 1, 2012, the SFERS Plan provides for a Supplemental COLA in years when there are sufficient “excess” investment earnings in the SFERS Plan and the SFERS Plan is fully funded on a market value of assets basis. The maximum benefit adjustment is 3.5% including the Basic COLA. For members hired on or after January 7, 2012, Supplemental COLAs will not be permanent adjustments to retirement benefits.

CalPERS – CalPERS provides service retirement and disability benefits, annual cost of living adjustments and death benefits to plan members, who must be public employees and beneficiaries. Benefits are based on a final compensation which is the highest average pay rate and special compensation during any consecutive one-year or three-year period. The cost of living adjustments for the CalPERS plans are applied as specified by the Public Employees’ Retirement Law. The California Public Employees’ Pension Reform Act (PEPRA), which took effect in January 2013, changes the way CalPERS retirement and health benefits are applied, and places compensation limits on members. As such, members who established CalPERS membership on or after January 1, 2013 are known as “PEPRA” members.

105 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

The CalPERS’ provisions and benefits in effect at June 30, 2016, are summarized as follows:

City Miscellaneous Plan City Safety Plan Prior to On or after Prior to On or after Hire date January 1, 2013 January 1, 2013* January 1, 2013 January 1, 2013 Benefit formula 2% @ 60 2% @ 50, 2% @ 55, 2% @ 57, or 3% @ 55 or 2.7% @ 57 Benefit vesting schedule 5 years of service 5 years of service 5 years of service Benefit payments Monthly for life Monthly for life Monthly for life Required employee contribution rates 5.00% 7.00% to 12.25% 10.00% to 12.25% Required employer contribution rates 9.96% 24.73% 24.73%

Transportation Authority Successor Agency Miscellaneous Plan Miscellaneous Plan Prior to On or after Prior to On or after Hire date January 1, 2013 January 1, 2013 January 1, 2013 January 1, 2013 Benefit formula 2.0% @ 55 2% @ 62 2% @ 55 2% @ 62 Benefit vesting schedule 5 years of service 5 years of service 5 years of service 5 years of service Benefit payments Monthly for life Monthly for life Monthly for life Monthly for life Required employee contribution rates 7.00% 6.25% 7.00% 6.50% Required employer contribution rates 8.51% 6.24% 22.76% 9.52%

* For the City Miscellaneous Plan, there are no current active employees hired on or after January 1, 2013. For the Treasure Island Miscellaneous Plan, there are no current active employees.

At June 30, 2016, the CalPERS’ City Safety Plan had a total of 2,311 members who were covered by these benefits, which includes 944 inactive employees or beneficiaries currently receiving benefits, 329 inactive employees entitled to but not yet receiving benefits, and 1,038 active employees.

Contributions

For the years ended June 30, 2016 and 2015, the City’s actuarial determined contributions were as follows: 2016 2015 SFERS Plan...... $ 496,343 $ 556,511 * City CalPERS Miscellaneous Plan...... 33 31 City CalPERS Safety Plan...... 23,629 20,718 ** Transportation Authority CalPERS Classic & PEPRA Miscellaneous Plans...... 280 400 Successor Agency CalPERS Classic & PEPRA Miscellaneous Plans...... 828 598 Treasure Island Development Authority CalPERS Miscellaneous Plan...... 2 2 $ 521,115 $ 578,260

* Fiscal Year 2015 SFERS Plan balance was decreased by $8.6 million as a result of early implementation of GASB Statement No. 82. Specifically, the 'employer pickup' amount which posted as an employer contribution was retroactively adjusted. This amount is now considered an employee contribution consistent with Statement No. 82. ** In Fiscal Year 2015 this amount was based on an estimate. A $102K adjustment was made to align the estimated employer contribution amount with the actual employer contribution per the June 30, 2015 Agent Multiple-Employer CalPERS report.

SFERS – Contributions are made to the basic SFERS Plan by both the City and the participating employees. Employee contributions are mandatory as required by the Charter. Employee contribution rates for fiscal year 2016 varied from 7.5% to 13.0% as a percentage of gross covered salary. For fiscal year ended June 30, 2016, most employee groups agreed through collective bargaining for employees to contribute the full amount of the employee contributions on a pretax basis. The City is required to contribute at an actuarially determined rate. Based on the July 1, 2014 actuarial report, the required employer contribution rates for fiscal year 2016 were 18.3% to 22.8%.

106 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

CalPERS – Section 20814(c) of the California Public Employees’ Retirement Law requires that the employer contribution rates for all public employers be determined on an annual basis by the actuary and shall be effective on the July 1 following notice of a change in the rate. Funding contributions for the PERF is determined annually on an actuarial basis as of June 30 by CalPERS. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by public employees during the year, with an additional amount to finance any unfunded accrued liability.

Net Pension Liability

The table below shows how the net pension liability (NPL) as of June 30, 2016 is distributed.

Governmental activities…………………………………………$ 1,355,280 Business-type activities………………………………………… 976,938 Fiduciary funds…………………………………………………… 16,563 Component Unit - Treasure Island Development Authority… 24 Total………………………………………………………$ 2,348,805

As of June 30, 2016, the City’s NPL is comprised of the following:

Share of Net Proportionate Pension Liability Share (Asset) SFERS Plan…………………………………………………………………………… 93.9032%$ 2,156,049 City CalPERS Miscellaneous Plan…………………………………………………… -0.2033% (13,956) City CalPERS Safety Plan..…………………………………………………………… N/A 188,837 Transportation Authority CalPERS Classic & PEPRA Miscellaneous Plans..… 0.0188% 1,288 Successor Agency CalPERS Classic & PEPRA Miscellaneous Plans..……… 0.2413% 16,563 Treasure Island Development Authority CalPERS Miscellaneous Plan………… 0.0004% 24

Total…………………………………………………………………………… $ 2,348,805

The City’s NPL for each of its cost-sharing plans is measured as a proportionate share of the plans’ NPL. The City’s NPL of each of its cost-sharing plans is measured as of June 30, 2015, and the total pension liability for each cost-sharing plan used to calculate the NPLs was determined by an actuarial valuation as of June 30, 2014, rolled forward to June 30, 2015, using standard update procedures. The City’s proportion of the NPL for the SFERS Plan was based on the City’s long-term share of contributions to SFERS relative to the projected contributions of all participating employers, actuarially determined. The City’s proportions of the NPL for the CalPERS plans were actuarially determined as of the valuation date.

107 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

The City’s proportionate share and NPL of each of its cost-sharing plans as of June 30, 2015 and 2014 were as follows:

June 30, 2015 (Measurement Date) June 30, 2014 Share of Net Share of Net Propor- Pension Propor- Pension tionate Liability tionate Liability Change Share (Asset) Share (Asset) (Decrease) SFERS Plan……………………………………………………………………………… 93.9032%$ 2,156,049 93.7829%$ 1,660,365 $ 495,684 City CalPERS Miscellaneous Plan……………………………………………………… -0.2033% (13,956) -0.1829% (11,381) (2,575) Transportation Authority CalPERS Classic & PEPRA Miscellaneous Plans..…… 0.0188% 1,288 0.0208% 1,299 (11) Successor Agency Classic & PEPRA CalPERS Miscellaneous Plans..………… 0.2413% 16,563 0.2550% 15,869 694 Treasure Island Development Authority CalPERS Miscellaneous Plan…………… 0.0004% 24 0.0000% - 24

Total……………………………………………………………………………… $ 2,159,968 $ 1,666,152 $ 493,816

The City’s NPL for the CalPERS City Safety Plan (agent plan) is measured as the total pension liability, less the CalPERS Safety Plan’s fiduciary net position. The change in the NPL for the City CalPERS Safety Plan is as follows:

Increase (Decrease) Total Plan Net Pension Pension Fiduc ia r y Liability Liability Net Position (Asset) Balance at June 30, 2014 (VD)……………………… $ 1,087,527 $ 920,371 $ 167,156 Change in year: Service cost………………………………………… 30,987 - 30,987 Interest on the total pension liability…………… 80,057 - 80,057 Changes of assumptions………………………… (19,949) - (19,949) Difference between expected and actual experience………………………………………… (14,218) - (14,218) Plan to plan resource movement……………… - (4) 4 Contributions from the employer………………… - 20,718 (20,718) Contributions from employees………………… - 15,061 (15,061) Net investment income …………………………… - 20,469 (20,469) Benefit payments, including refunds of employee contributions…………………………… (44,699) (44,699) - Administrative expense……………………….. (1,048) 1,048 Net changes during measurement period………… 32,178 10,497 21,681 Balance at June 30, 2015 (MD) $ 1,119,705 $ 930,868 $ 188,837

108 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Pension Expenses and Deferred Outflows/Inflows of Resources Related to Pensions

For the year ended June 30, 2016, the City recognized pension expense including amortization of deferred outflows/inflows related to pension items as follows:

Primary Government Component Unit Treasure Island Gove r nm e nta l Business-type Fiduciary Development Activities Activities Funds Authority Total SFERS Plan…………………………………………………………………………… $ 56,971 $ 49,528 $ - $ - $ 106,499 City CalPERS Miscellaneous Plan………………………………………………… (429) - - - (429) City CalPERS Safety Plan..…………………………………………………………… 13,168 - - - 13,168 Transportation Authority CalPERS Classic & PEPRA Miscellaneous Plans… (108) - - - (108) Successor Agency CalPERS Classic & PEPRA Miscellaneous Plans..……… - - 1,681 - 1,681 Treasure Island District Authority CalPERS Miscellaneous Plan ..………….. - - - 7 7 Total pension expense$ 69,602 $ 49,528 $ 1,681 $ 7 $ 120,818

At June 30, 2016, the City’s reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources.

CalPERS SFERS Plan Miscellaneous Plans City CalPERS Safety Plan Total Deferred Deferred Deferred Deferred Deferred Deferred Deferred Deferred Outflows of Inflows of Outflows of Inflows of Outflows of Inflows of Outflows of Inflows of Resources Resources Resources Resources Resources Resources Resources Resources Pension contributions subsequent to measurement date……………….. $ 496,343 $ - $ 1,143 $ - $ 23,629 $ - $ 521,115 $ - Change in assumptions…………… 162,900 41,307 - 629 - 15,310 162,900 57,246 Difference between expected and actual experience…………………….. - 148,728 67 - - 10,912 67 159,640 Change in employer's proportion and differences between the employer's contributions and the employer's proportionate share of contributions………………………… 3,221 7,698 1,584 12,259 - - 4,805 19,957 Net differences between projected and actual earnings on plan investments…………………………… - 510,360 - 316 - 8,585 - 519,261 Total$ 662,464 $ 708,093 $ 2,794 $ 13,204 $ 23,629 $ 34,807 $ 688,887 $ 756,104

At June 30, 2016, the City reported $521.1 million as deferred outflows of resources related to contributions subsequent to the measurement date, which will be recognized as a reduction to net pension liability in the year ending June 30, 2017. Other amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized as pension expense as follows: Deferred Outflows/ Year Ending (Inflows) of June 30 Resources 2017………………… $ (246,999) 2018………………… (246,965) 2019………………… (246,049) 2020………………… 151,681 Total $ (588,332)

109 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Actuarial Assumptions

A summary of the actuarial assumptions and methods used to calculate the total pension liability as of June 30, 2015 is provided below, including any assumptions that differ from those used in the July 1, 2014 actuarial valuation.

SFERS Plan Actuarial Assumptions CalPERS Miscellaneous and Safety Plans Valuation date……………………………… June 30, 2014 updated to June 30, 2015 June 30, 2014 updated to June 30, 2015 Measurement date……………………… June 30, 2015 June 30, 2015 Actuarial cost method..…………………… Entry-age normal cost method Entry-age normal cost method Investment rate of return………………… 7.50%, net of pension plan investment 7.65%, net of pension plan investment expense, including expenses inflation

Municipal bond yield……………………… 4.31% as of June 30, 2014 3.85% as of June 30, 2015 Bond Buyer 20-Bond GO Index, July 2, 2014 and July 2, 2015 Inflation…………………………………… 3.33% 2.75% Projected salary increases………………3.83% plus merit component based on Varies by Entry Age and Service employee classification and years of service Discount rate……………………………… 7.46% as of June 30, 2015 7.65% as of June 30, 2015 Basic COLA………………………………… Old Miscellaneous and All New Plans…………………… 2.00% Contract COLA up to 2.75% until Old Police and Fire: Purchasing Protection Allowance Floor on Pre 7/1/75 Retirements………… 3.00% Purchasing Power applies. 2.75% Chapters A8.595 and A8.596…… 4.00% thereafter. Chapters A8.559 and A8.585…… 5.00%

Mortality rates for SFERS active members were based upon the RP-2000 Employee Tables for Males and Females projected using Scale AA to 2030 for females and to 2005 for males. Mortality rates for SFERS healthy annuitants were based upon the RP-2000 Healthy Annuitant Tables for Males and Females projected using Scale AA to 2020. Refer to SFERS’s July 1, 2014 actuarial valuation report for a complete description of all other assumptions, which can be found on the Retirement System website.

The actuarial assumptions used in the SFERS June 30, 2014 valuation were based upon the results of an experience study for the period July 1, 2004 through June 30, 2009.

For CalPERS, the mortality table used was developed based on CalPERS’ specific data. The table includes 20 years of mortality improvements using Society of Actuaries Scale BB. All other actuarial assumptions used in the CalPERS June 30, 2014 valuation were based on the results of an actuarial experience study for the period 1997 to 2011, including updates to salary increase, mortality and retirement rates. The Experience Study report can be obtained at CalPERS’ website under Forms and Publications.

GASB Statement No. 68 states that the long-term expected rate of return should be determined net of pension plan investment expense but without reduction for pension plan administrative expense. The CalPERS discount rate was changed from 7.50 percent (net of administrative expense in 2014) to 7.65 percent as of the June 30, 2015 measurement date to correct the adjustment which previously reduced the discount rate for administrative expense.

Discount Rates

SFERS – The beginning and end of year measurements are based on different assumptions and contribution methods that result in different discount rates. The discount rate was 7.58% as of June 30, 2014 and 7.46% as of June 30, 2015.

110 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

The discount rate used to measure SFERS’s total pension liability as of June 30, 2015 was 7.46%. The projection of cash flows used to determine the discount rate assumed that plan member contributions will continue to be made at the rates specified in the Charter. Employer contributions were assumed to be made in accordance with the contribution policy in effect for July 1, 2014 actuarial valuation. That policy includes contributions equal to the employer portion of the entry age normal costs for members as of the valuation date, a payment for the expected administrative expenses, and an amortization payment on the unfunded actuarial liability. The amortization payment is based on closed periods that vary in length depending on the source. Charter amendments prior to July 1, 2014 are amortized over 20 years. After July 1, 2014, any Charter changes to active member benefits are amortized over 15 years and changes to inactive member benefits, including Supplemental COLAs, are amortized over 5 years. The remaining unfunded actuarial liability not attributable to Charter amendments as of July 1, 2013 is amortized over a 19-year period commencing July 1, 2014. Experience gains and losses and assumption or method changes on or after July 1, 2014 are amortized over 20 years. All amortization schedules are established as a level percentage of payroll so payments increase 3.75% each year. The unfunded actuarial liability is based on an actuarial value of assets that smooths investment gains and losses over five years and a measurement of the actuarial liability that excludes the value of any future Supplemental COLAs.

While the contributions and measure of the actuarial liability in the valuation do not anticipate any Supplemental COLAs, the projected contributions for the determination of the discount rate include the anticipated future amortization payments on future Supplemental COLAs for current members when they are expected to be granted. For a Supplemental COLA to be granted, the market value of assets must exceed the actuarial liability at the beginning of the year and the actual investment earnings during the year must exceed the expected investment earnings on the actuarial value of assets. When a Supplemental COLA is granted, the amount depends on the amount of excess earnings and the basic COLA amount for each membership group. In most cases, the large majority of members receive a 1.50% Supplemental COLA.

Because the probability of a Supplemental COLA depends on the current funded level of the Retirement System, the Retirement System developed an assumption as of June 30, 2015, of the probability and amount of Supplemental COLA for each future year. The table below shows the net assumed Supplemental COLAs for members with a 2.00% basic COLA for sample years.

Year Ending June 30 Assumption

2016 0.000% 2021 0.345% 2026 0.375% 2031 0.375% 2036+ 0.375%

The projection of benefit payments to current members for determining the discount rate includes the payment of anticipated future Supplemental COLAs.

Based on these assumptions, the Retirement System’s fiduciary net position was projected to be available to make projected future benefit payments for current members until fiscal year end 2076 when only a portion of the projected benefit payments are expected to be made from the projected fiduciary net position. Projected benefit payments are discounted at the long-term expected return on assets of 7.50% to the extent the fiduciary net position is available to make the payments and at the municipal bond rate of 3.85% to the extent they are not available. The single equivalent rate used to determine the total pension liability as of June 30, 2015 is 7.46%.

111 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

The long-term expected rate of return on pension plan investments was 7.50%. It was set by the Retirement Board after consideration of both expected future returns and historical returns experienced by the by the Retirement System. Expected future returns were determined by using a building-block method in which best-estimate ranges of expected future real rates of return were developed for each major asset class. These ranges were combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation.

Target allocation and best estimates of geometric long-term expected real rates of return (net of pension plan investment expense and inflation) for each major asset class are summarized in the following table. Long-term Target Expected Real Asset Class Allocation Rate of Return Global equity 40.0% 5.1% Fixed income 20.0% 1.2% Private equity 18.0% 7.5% Real assets 17.0% 4.1% Hedge Funds/Absolute Return 5.0% 3.5%

CalPERS - The discount rate used to measure each of the CalPERS Miscellaneous Plans and the Safety Plan total pension liability was 7.65 percent. To determine whether the municipal bond rate should be used in the calculation of a discount rate for each plan, CalPERS stress tested plans that would most likely result in a discount rate that would be different from the actuarially assumed discount rate. Based on the testing, none of the tested plans run out of assets. Therefore, the current 7.65 percent discount rate is adequate and the use of the municipal bond rate calculation is not necessary. The long-term expected discount rate of 7.65 percent is applied to all plans in the Public Employees Retirement Fund. The stress test results are presented in a detailed report called “GASB Crossover Testing Report” that can be obtained at CalPERS’ website under the GASB Statement No. 68 section.

The long-term expected rate of return on pension plan investments was determined using a building block method in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class.

In determining the long-term expected rate of return, CalPERS took into account both short-term and long-term market return expectations as well as the expected pension fund cash flows. Such cash flows were developed assuming that both members and employers will make their required contributions on time and as scheduled in all future years. Using historical returns of all the funds’ asset classes, expected compound (geometric) returns were calculated over the short-term (first 10 years) and the long-term (11-60 years) using a building-block approach. Using the expected nominal returns for both short-term and long-term, the present value of benefits was calculated. The expected rate of return was set by calculating the single equivalent expected return that arrived at the same present value of benefits for cash flows as the one calculated using both short-term and long-term returns. The expected rate of return was then set equivalent to the single equivalent rate calculated above and rounded down to the nearest one quarter of one percent.

112 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

The table below reflects long-term expected real rate of return by asset class. The rate of return was calculated using the capital market assumptions applied to determine the discount rate and asset allocation. Target Real Return Real Return Asse t Cla ss Allocation Years 1 - 10 (1) Years 11+ (2) Global equity 51.0% 5.25% 5.71% Global fixed income 19.0% 0.99% 2.43% Inflation sensitive 6.0% 0.45% 3.36% Private equity 10.0% 6.83% 6.95% Real estate 10.0% 4.50% 5.13% Infrastructure and forestland 2.0% 4.50% 5.09% Liquidity 2.0% -0.55% -1.05%

______(1) An expected inflation of 2.5% used for this period. (2) An expected inflation of 3.0% used for this period.

Sensitivity of Proportionate Share of the Net Pension Liability to Changes in the Discount Rate

The following presents the City’s proportionate share of the NPL for each of the City’s cost sharing retirement plans, calculated using the discount rate, as well as what the City’s proportionate share of the net pension liability (asset) would be if it were calculated using a discount rate that is 1% lower or 1% higher than the current rate.

1% Decrease Current Share 1% Increase Cost-Sharing Pension Plans Share of NPL of NPL Share of NPL Proportionate Share of Net Pension Liability @ 6.46% @ 7.46% @ 8.46% SFERS………………………………………………………………………………….$ 4,767,771 $ 2,156,049 $ (34,278)

1% Decrease Current Share 1% Increase Share of NPL of NPL Share of NPL @ 6.65% @ 7.65% @ 8.65% City CalPERS Miscellaneous Plan…………………………………………………..$ (11,026) $ (13,956) $ (16,375) Transportation Authority CalPERS Classic & PEPRA Miscellaneous Plans…… 2,349 1,289 413 Successor Agency CalPERS Classic & PEPRA Miscellaneous Plans………… 31,054 16,563 4,600 Treasure Island District Authority CalPERS Miscellaneous Plans………………… 35 24 16

The following presents the NPL, calculated using the discount rate of 7.65% in effect as of the measurement date, as well as what the NPL would be if they were calculated using discount rates that are 1.00% lower (6.65%) or 1.00% higher (8.65%) than the rates used, for the City’s agent-multiple employer plan:

1% Decrease Measurement 1% Increase Agent Pension Plan @ 6.65% Date @ 7.65% @ 8.65% City CalPERS Safety Plan - Net Pension Liability………………………………..$ 342,724 $ 188,837 $ 61,895

Detailed information about the CalPERS Safety Plan’s fiduciary net position is available in a separately issued CalPERS financial report, copies may be obtained from the CalPERS website at www.calpers.ca.gov.

113 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Deferred Compensation Plan The City offers its employees a deferred compensation plan in accordance with Internal Revenue Code (IRC) Section 457. The plan, available to all employees, permits them to defer a portion of their salary until future years. The deferred compensation is not available to employees or other beneficiaries until termination, retirement, death, or unforeseeable emergency.

The City has no administrative involvement and does not perform the investing function. The City has no fiduciary accountability for the plan and, accordingly, the plan assets and related liabilities to plan participants are not included in the basic financial statements.

Health Service System The Health Service System was established in 1937. Health care benefits of employees, retired employees and surviving spouses are financed by beneficiaries and by the City through the Health Service System. The employers’ contribution, which includes the San Francisco Community College District, San Francisco Unified School District and the San Francisco Superior Court, amounted to approximately $674.6 million in fiscal year 2015-16. The employers’ contribution is mandated and determined by Charter provision based on similar contributions made by the ten most populous counties in California and the contribution models negotiated with the unions. Included in this amount is $193.8 million to provide postemployment health care benefits for 27,126 retired participants, of which $158.4 million related to City employees. The City’s liability for postemployment health care benefits is enumerated below. The City’s contribution is paid out of current available resources and funded on a pay-as-you-go basis. The Health Service System issues a publicly available financial report that includes financial statements. That report may be obtained by writing to the San Francisco Health Service System, 1145 Market Street, Suite 300, San Francisco, CA 94103 or from the City’s website.

(b) Postemployment Health Care Benefits City (excluding the Transportation Authority and the Successor Agency) Plan Description – The City maintains a single-employer, defined benefit other postemployment benefits plan, which provides health care benefits to employees, retired employees, and surviving spouses, through the City’s Health Service System outlined above. Health care benefits are provided to members of the Health Service System through three plan choices: City Health Plan, Kaiser, and Blue Shield. The City does not issue a separate report on its other postemployment benefit plan.

The City prefunds its OPEB obligations through the Retiree Health Care Trust Fund (RHCTF), an irrevocable trust fund that allows participating employers to prefund certain postemployment benefits other than pensions for their covered employees. The RHCTF is an agent multiple-employer trust and has two participating employers: the City and the San Francisco Community College District (Community College District). From the most recent actuarial valuation reports as of July 1, 2014, there were 29,001 active members, 25,919 retirees and beneficiaries, and 2,843 vested, terminated members for the City. The Community College District had 1,369 active members and 1,041 eligible retirees.

The RHCTF is administered by the City and is presented as an other post-employment benefit trust fund. It is governed by a Retiree Health Care Board of Administration consisting of five trustees: one selected by the City Controller, one by the City Treasurer, one by the Executive Director of the San Francisco Employees’ Retirement System, and two elected by the active and retired members of the City’s Health Service System. The RHCTF issues a publicly available financial report consisting of financial statements and required supplementary information for the RHCTF in aggregate. The report may be obtained from City Hall, Room 316, 1 Dr. Carlton B. Goodlett Place, San Francisco, CA 94102.

Funding Policy – The contribution requirements of plan members and the City are based on a pay-as- you-go basis. For the year ended June 30, 2016, the City paid $158.4 million for postemployment

114 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands) healthcare benefits on behalf of its retirees and contributed $10.5 million to the Retiree Health Care Trust Fund.

Annual OPEB Cost and Net OPEB Obligation – The City’s annual other postemployment benefits (OPEB) expense is calculated based on the annual required contribution (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement No. 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover the normal cost of each year and any unfunded actuarial liabilities (or funding excess) amortized over thirty years. The ARC was determined based on the July 1, 2014 actuarial valuation.

The net OPEB obligations are reflected in the statements of net position of the governmental activities, business-type activities, and fiduciary funds. The following table shows the components of the City’s annual OPEB cost for the year, the amount contributed to the plan, and changes in the City’s net OPEB obligation: Annual required contribution$ 354,540 Interest on Net OPEB obligation 89,557 Adjustment to annual required contribution (117,964) Annual OPEB cost 326,133 Contribution made (168,855) Increase in net OPEB obligation 157,278 Net OPEB obligation - beginning of year 1,990,156 Net OPEB obligation - end of year$ 2,147,434

The table below shows how the total net OPEB obligation as of June 30, 2016, is distributed.

Governmental activities$ 1,202,986 Business-type activities 878,590 Fiduciary funds 65,858 Net OPEB obligation - end of year$ 2,147,434

Eligible fiduciary funds' employees are City employees and thereby eligible for postemployment health benefits. These obligations are reported as other liabilities in the City's fiduciary funds financial statements.

Three-year trend information is as follows: Percentage of Fiscal Year Annual Annual OPEB Net OPEB Ended OPEB Cost Cost Contributed Obligation 6/30/2014$ 353,251 47.2%$ 1,793,753 6/30/2015 363,643 46.0% 1,990,155 6/30/2016 326,133 51.8% 2,147,434

Funded Status and Funding Progress – The unfunded actuarial accrued liability is being amortized as a level percentage of expected payroll over an open thirty-year period. As of July 1, 2014, the most recent actuarial valuation date, the funded status of the Retiree Health Care Benefits was 1.1%. The actuarial accrued liability for benefits was $4.26 billion, and the actuarial value of assets was $49.0 million, resulting in an unfunded actuarial accrued liability (UAAL) of $4.21 billion. As of July 1, 2014, the estimated covered payroll (annual payroll of active employees covered by the plan) was $2.62 billion and the ratio of the UAAL to the covered payroll was 160.8%.

115 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Actuarial Methods and Assumptions – Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contribution of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents multi-year trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits.

Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations.

In the actuarial valuation as of July 1, 2014, the entry age normal cost method was used. Under this method, the actuarial present value of the projected benefits of each individual included in the valuation is allocated as a level percent of expected salary for each year of employment between entry age (age at hire) and assumed exit (maximum retirement age). Unfunded liabilities are amortized using the level percentage of payroll over a rolling 30-year period. The actuarial assumptions included a 4.50% investment rate of return on investment; 3.25% inflation rate; 3.75% payroll growth; and actual medical premiums from 2014 through 2017 and grading down to an ultimate trend rate beginning in 2032 of 4.50%.

The San Francisco Retiree Health Care Trust Fund (RHCTF) was established in December 2010 by the Retiree Health Trust Fund Board of the City. The RHCTF was established to receive employer and employee contributions prescribed by the Charter for the purpose of pre-funding certain postretirement health benefits. Proposition B requires employees hired on or after January 10, 2009 to contribute 2% of pay and the employer to contribute 1% of pay. Between January 10, 2009 and the establishment of the RHCTF, contributions were set aside and deposited into the RHCTF when it was established. Proposition C also requires all employees hired on or before January 9, 2009 to contribute 0.25% of pay to the RHCTF commencing July 1, 2016, increasing annually by 0.25% to a maximum of 1.0% of pay. The employer is required to contribute an equal amount. The RHCTF is currently invested in short- term fixed income securities.

The Charter amendment passed by voters as Proposition A on November 5, 2013 prohibits withdrawals from the RHCTF until sufficient funds are set-aside to pay for all future retiree health care costs as determined by an actuarial study. Limited withdrawals prior to accumulating sufficient funds will be permitted only if annually budgeted retiree health care costs rise above 10% of payroll expenses, and will be limited to no more than 10% of the RHCTF balance. Proposition A allows for revisions to these funding limitations and requirements only upon the recommendation of the Controller and an external actuary and if approved by the RHCTF Board, two-thirds of the Board of Supervisors, and the Mayor.

San Francisco County Transportation Authority The Transportation Authority maintains a separate single-employer defined benefit OPEB plan and did not have a net OPEB obligation as of June 30, 2016. The Transportation Authority’s most recent actuarial valuation was performed as of June 30, 2015, covering the year ended June 30, 2016. The Transportation Authority’s OPEB plan is for retiree healthcare benefits and was 57.3% funded and the unfunded actuarial accrued liability was $0.9 million. As of June 30, 2015, the estimated covered payroll was $3.9 million and the ratio of the UAAL was 22.2%. Details of the Transportation Authority’s OPEB plan may be found in its financial statements for the year ended June 30, 2016. Financial statements

116 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands) for the Transportation Authority can be obtained from their finance and administrative offices at 1455 Market Street, 22nd Floor, San Francisco, CA 94103 or the Transportation Authority’s website.

For the year ended June 30, 2016, the Transportation Authority’s annual OPEB expense of $200.7 was greater than the ARC. Three-year trend information is as follows:

Fiscal Year Annual Annual OPEB Net OPEB Ended OPEB Cost Cost Contributed Obligation 6/30/2014$ 138.4 100%$ - 6/30/2015 138.4 100% - 6/30/2016 200.7 103% (5.8)

Successor Agency Effective February 1, 2012, upon the operation of law to dissolve the former Agency, the Successor Agency assumed the former Agency’s postemployment healthcare plan. The Successor Agency sponsors a single-employer defined benefit plan providing other postemployment benefits (OPEB) to employees who retire directly from the former Agency and/or the Successor Agency. The Successor Agency is a contracting agency under the Public Employees’ Medical and Hospital Care Act (PEMHCA) healthcare plan, which is administered by CalPERS. The Successor Agency pays monthly retiree medical benefit contributions to PEMHCA. Premiums in excess of the above Successor Agency contributions are paid by the retirees. Benefits provisions are established and may be amended by the Successor Agency.

The Successor Agency participates in the California Employers’ Retiree Benefit Trust (CERBT) Fund. CERBT is administered by CalPERS and is an agent multiple-employer trust. Copies of CalPERS’ financial report may be obtained from CalPERS website at www.calpers.ca.gov or from CalPERS at 400 Q Street, Sacramento, California 95811.

Funding Policy – The contribution requirements of the plan members and the Successor Agency are established by and may be amended by the Successor Agency. The Successor Agency intends to fund plan benefits through the CERBT by contributing at least 100% of the annual required contribution.

The annual required contribution (ARC) is an amount actuarially determined in accordance with the parameters of GASB Statement No. 45. During the year ended June 30, 2016, the Successor Agency contributed $1.2 million to this plan.

Annual Other Postemployment Benefit Cost and Net Obligation – The Successor Agency’s annual OPEB cost (expense) is calculated based on the ARC of the employer. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed thirty years. Annual OPEB Cost (AOC) equals the plan’s ARC, adjusted for historical differences between the ARC and amounts actually contributed.

117 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

The following table shows the components of the Successor Agency’s annual OPEB cost for the year ended June 30, 2016, and the changes in the net OPEB obligation:

Annual required contribution$ 813 Interest on Net OPEB obligation 58 Adjustment to annual required contribution (75) Annual OPEB cost 796 Contribution made (1,199) Decrease in net OPEB obligation (403) Net OPEB obligation - beginning of year 833 Net OPEB obligation - end of year$ 430

Three-year trend information is as follows: Percentage of Fiscal Year Annual Annual OPEB Net OPEB Ended OPEB Cost Cost Contributed Obligation 6/30/2014$ 912 139%$ 867 6/30/2015 918 104% 833 6/30/2016 796 151% 430

Funded Status and Funding Progress – The funded status of the plan of the Successor Agency as of July 1, 2015, the plan’s most recent actuarial valuation date, was as follows:

Actuarial accrued liability (AAL)$ 10,998 Actuarial value of plan assets 2,833 Unfunded actuarial accrued liability (UAAL)$ 8,165 Funded ratio (actuarial value of plan assets/AAL) 25.8% Covered payroll (active plan members)$ 4,261

UAAL as a percentage of covered payroll 191.6%

Actuarial Methods and Assumptions – Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefits costs between the employer and plan members to that point.

Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future.

The ARC for the year ended June 30, 2016 and the funding status of the plan was determined based on the July 1, 2015 actuarial valuation using the entry age normal actuarial cost method. Actuarial assumptions include (a) investment return and discount rate of 7.0%; (b) medical costs trend increases of 4%; (c) inflation rate of 2.75%; (d) payroll growth of 2.75%; and (e) 2014 CalPERS mortality for miscellaneous employees. The Successor Agency’s initial and residual UAAL is being amortized as a level dollar amount over closed 30 years and open 22 years, respectively.

118 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

(10) FUND EQUITY

(a) Governmental Fund Balance Fund balances for all the major and nonmajor governmental funds as of June 30, 2016, were distributed as follows: Nonmajor Total Governmental Governmental General Fund Funds Funds Nonspendable Imprest Cash, Prepaids, and Deposits...... $ 522 $ 82 $ 604 Restricted Rainy Day...... 120,106 43,131 163,237 Public Protection Police...... - 19,107 19,107 Sheriff...... - 1,203 1,203 Other Public Protection...... - 15,257 15,257 Public Works, Transportation & Commerce...... - 201,781 201,781 Human Welfare & Neighborhood Development...... - 226,831 226,831 Affordable Housing...... - 256,381 256,381 Community Health...... - 26,683 26,683 Culture & Recreation...... - 129,394 129,394 General Administration & Finance...... - 20,400 20,400 Capital Projects...... - 383,267 383,267 Debt Service...... - 120,521 120,521 Total Restricted...... 120,106 1,443,956 1,564,062 Committed Budget Stabilization...... 178,434 - 178,434 Recreation and Parks Expenditure Savings...... 8,736 - 8,736 Total Committed...... 187,170 - 187,170 Assigned Public Protection Police...... 8,071 857 8,928 Sheriff...... 4,349 2,156 6,505 Other Public Protection...... 16,923 - 16,923 Public Works, Transportation & Commerce...... 65,614 34,248 99,862 Human Welfare & Neighborhood Development...... 52,727 5,060 57,787 Affordable Housing...... 22,498 - 22,498 Community Health...... 64,943 - 64,943 Culture & Recreation...... 15,750 11,866 27,616 General Administration & Finance...... 54,329 11,898 66,227 General City Responsibilities...... 54,575 - 54,575 Capital Projects...... 125,107 - 125,107 Litigation and Contingencies...... 145,443 - 145,443 Subsequent Year's Budget...... 249,238 - 249,238 Total Assigned...... 879,567 66,085 945,652 Unassigned...... 241,797 (103,811) 137,986 Total...... $ 1,429,162 $ 1,406,312 $ 2,835,474

119 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

(b) General Fund Stabilization and Other Reserves Rainy Day Reserve The City maintains a “Rainy Day” or economic stabilization reserve under Charter Section 9.113.5, with separate accounts for the benefit of the City (the “City Reserve”) and the San Francisco Unified School District (the “School Reserve”). In any year when the City projects that total General Fund revenues for the upcoming budget year are going to be more than 5 percent higher than the General Fund revenues for the current year, the City automatically deposits one-half of the “excess revenues” in the Rainy Day Reserve. Seventy-five percent of the deposit is placed in the City Reserve and twenty-five percent is placed in the School Reserve. The total amount of money in the Rainy Day Reserve may not exceed ten percent of the City’s actual total General Fund revenues. The City may spend money from the City Reserve for any lawful governmental purpose, but only in years when the City projects that total General Fund revenues for the upcoming year will be less than the current year’s total General Fund revenues, i.e., years when the City expects to take in less money than it had taken in for the current year. In those years, the City may spend up to half the money in the City Reserve, but no more than is necessary to bring the City's total available General Fund revenues up to the level of the current year. The School District may withdraw up to half the money in the School Reserve when it expects to collect less money per student than the previous fiscal year and would have to lay off a significant number of employees. The School District’s Board can override those limits and withdraw any amount in the School Reserve by a two-thirds vote. The City does not expect to routinely spend money from the Rainy Day Reserve after evaluating its recent General Fund revenues trends and its most recent update to the Five-Year Financial Plan covering fiscal years 2015-16 through 2019-20.

Budget Stabilization Reserve The City sets aside as an additional reserve 75 percent of (1) real estate transfer taxes in excess of the average collected over the previous five years, (2) proceeds from the sale of land and capital assets, and (3) ending unassigned General Fund balances. The City will be able to spend those funds in years in which revenues decline or grow by less than two percent, after using the amount legally available from the Rainy Day Reserve. The City, by a resolution of the Board of Supervisors adopted by a two- thirds' vote, may temporarily suspend these provisions following a natural disaster that has caused the Mayor or the Governor to declare an emergency, or for any other purpose. The City does not expect to routinely spend money from the Budget Stabilization Reserve after evaluating its recent General Fund revenues trends and its most recent update to the Five-Year Financial Plan covering fiscal years 2015- 16 through 2019-20.

Recreation and Parks Expenditure Savings Reserve The City maintains a Recreation and Parks Expenditure Savings Reserve under Charter Section 16.107, which sets aside and maintains such an amount, together with any interest earned thereon, in the reserve account, and any amount unspent or uncommitted at the end of the fiscal year shall be carried forward to the next fiscal year and, subject to the budgetary and fiscal limitations of the Charter, shall be appropriated then or thereafter for capital and/or facility maintenance improvements to park and recreation facilities and other one-time expenditures of the Park and Recreation Department.

(c) Encumbrances At June 30, 2016, encumbrances recorded in the General Fund and nonmajor governmental funds were $191.0 million and $259.2 million, respectively.

(d) Restricted Net Position At June 30, 2016, the government-wide statement of net position reported restricted net position of $1,331.5 million in governmental activities and $538.5 million in business-type activities, of which $15.7 million and $67.6 million are restricted by enabling legislation in governmental activities and business- type activities, respectively.

120 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

The City issued general obligation bonds and certificates of participation for the purpose of rebuilding and improving Laguna Honda Hospital. General obligation bonds were also issued for the purpose of reconstructing and improving waterfront parks and facilities on Port property and for the retrofit and improvement work to ensure a reliable water supply (managed by the Water Enterprise) in an emergency or disaster and for certain street improvements managed by the SFMTA. These capital assets are reported in the City’s business-type activities. However, the debt service will be paid with governmental revenues and as such these general obligation bonds and certificates of participation are reported with unrestricted net position in the City’s governmental activities. In accordance with GASB guidance, the City reclassified $406.8 million of unrestricted net position of governmental activities, of which $290.1 million reduced net investment in capital assets and $116.7 million reduced net position restricted for capital projects to reflect the total column of the primary government as a whole perspective.

(e) Deficit Fund Balances and Net Position The Environmental Protection Fund, Human Welfare Fund, and Senior Citizens’ Program Fund had deficits of $0.1 million, $2.0 million, and $0.3 million, respectively, as of June 30, 2016. The deficits relate to unavailable revenue in various programs which is expected to be collected beyond 60 days of the end of fiscal year 2016.

The Moscone Convention Center Fund had a $101.4 million deficit as of June 30, 2016. The deficit is primarily related to the issuance of commercial paper for construction and will be covered by refinancing commercial paper as long term debt.

The Central Shops and Telecommunications and Information Internal Service Funds had deficits in total net position of $10.8 million and $6.9 million, respectively, as of June 30, 2016 mainly due to the other postemployment benefits liability accrued per GASB Statement No. 45 and the net pension liability and pension-related deferred inflows per GASB Statement No. 68. The operating deficits are expected to be reduced in future years through anticipated rate increases or reductions in the operating expenses. The rates are reviewed and updated annually.

Prior to February 1, 2012, the California Redevelopment Law provided tax increment financing as a source of revenue to redevelopment agencies to fund redevelopment activities. Once a redevelopment area was adopted, the former Agency could only receive tax increment to the extent that it could show on an annual basis that it has incurred indebtedness that must be repaid with tax increment. Due to the nature of the redevelopment financing, the former Agency liabilities exceeded assets. Therefore, the former Agency historically carried a deficit, which was expected to be reduced as future tax increment revenues were received and used to reduce its outstanding long-term debt. This deficit was transferred to the Successor Agency on February 1, 2012. At June 30, 2016, the Successor Agency has a deficit of $377.0 million, which will be eliminated with future redevelopment property tax revenues distributed from the Redevelopment Property Tax Trust Fund administered by the City’s Controller.

121 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

(11) UNAVAILABLE RESOURCES IN GOVERNMENTAL FUNDS

The deferred inflows of resources balance in governmental funds as of June 30, 2016 consists of the following unavailable resources:

Other Gove r nm e nta l Total Governmental General Fund Funds Funds Grant and subvention revenues...... $ 56,709 $ 59,021 $ 115,730 Property Tax...... 53,829 12,986 66,815 Teeter Plan...... 36,008 - 36,008 SB 90...... 8,218 - 8,218 Advances to Successor Agency...... - 14,602 14,602 Franchise tax...... 3,130 - 3,130 Loans...... 6,473 75,328 81,801

Total...... $ 164,367 $ 161,937 $ 326,304

California Senate Bill 90 (SB90), was adopted in 1972 and added to the State Constitution in 1979. When the Governor or Legislature mandates a new program or higher level of service upon local agencies and school districts, SB90 requires the State to reimburse local agencies and school districts for the cost of these new programs or higher levels of service. The balance in deferred inflows of resources is the value of reimbursement claims submitted to the State which are subject to audit for unallowable costs.

As described in Note 6, under the Teeter Plan the City is allocated secured property tax revenue which has been billed but not collected. Collections which have not occurred within the availability period are included in deferred inflows of resources in the General Fund.

(12) SAN FRANCISCO COUNTY TRANSPORTATION AUTHORITY

The Transportation Authority was created in 1989 by a vote of the San Francisco electorate. The vote approved Proposition B, which imposed a sales tax of one-half of one percent (0.5%), for a period not to exceed 20 years, to fund essential transportation projects. The types of projects to be funded with the proceeds from the sales tax were set forth in the San Francisco County Transportation Expenditure Plan (Plan), which was approved as part of Proposition B. The Transportation Authority was organized pursuant to Sections 131000 et seq. of the Public Utilities Code. Collection of the voter-approved sales tax began on April 1, 1990. The Transportation Authority administers the following programs:

Sales Tax Program. On November 4, 2003, the San Francisco voters approved Proposition K with a 74.7% affirmative vote, amending the City Business and Tax Code to extend the county-wide one-half of one percent sales tax, and to replace the 1989 Proposition B Plan with a new 30-year Expenditure Plan. The new Expenditure Plan includes investments in four major categories: 1) Transit; 2) Streets and Traffic Safety (including street resurfacing, and bicycle and pedestrian improvements); 3) Paratransit services for seniors and disabled people; and 4) Transportation System Management/Strategic Initiatives (including funds for neighborhood parking management, transportation/land use coordination, and travel demand management efforts). Major capital projects to be funded by the Proposition K Expenditure Plan include: A) development of the Bus Rapid Transit and Muni Metro Network; B) construction of the Muni Central Subway (Third Street Light Rail Project–Phase 2); C) construction of the Caltrain Downtown Extension to a rebuilt Transbay Terminal; and D) South Approach to the Golden Gate Bridge: Doyle Drive Replacement Project (re-envisioned as the Presidio Parkway). Pursuant to the provisions of Division 12.5 of the California Public Utilities Code, the Transportation Authority Board may adopt an updated Expenditure Plan any time after 20 years from the effective date of adoption of the Proposition K Expenditure Plan but no later than the last general election in which the Proposition K Expenditure Plan is in effect. The Sales Tax would continue as long as a new or modified plan is in effect. Under Proposition K legislation, the Transportation Authority

122 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands) directs the use of the Sales Tax and may spend up to $485.2 million per year and may issue up to $1.88 billion in bonds secured by the Sales Tax.

Congestion Management Agency Programs. On November 6, 1990, the Transportation Authority was designated under State law as the Congestion Management Agency (CMA) for the City. Responsibilities resulting from this designation include developing a Congestion Management Program, which provides evidence of the integration of land use, transportation programming and air quality goals; preparing a long-range countywide transportation plan to guide the City’s future transportation investment decisions; monitoring and measuring traffic congestion levels in the City; measuring the performance of all modes of transportation; and developing a computerized travel demand forecasting model and supporting databases. As the CMA, the Transportation Authority is responsible for establishing the City’s priorities for state and federal transportation funds and works with the Metropolitan Transportation Commission to program those funds to San Francisco projects.

Transportation Fund for Clean Air (TFCA) Program. On June 15, 2002, the Transportation Authority was designated to act as the overall program manager for the local guarantee (40%) share of transportation funds available through the TFCA program. Funds from this program, administered by the Bay Area Air Quality Management District come from a $4 vehicle registration fee on automobiles registered in the Bay Area. Through this program, the Transportation Authority recommends projects that benefit air quality by reducing motor vehicle emissions.

Proposition AA Administrator of County Vehicle Registration Fee Program. On November 2, 2010, San Francisco voters approved Proposition AA with a 59.6% affirmative vote, authorizing the Transportation Authority to collect an additional $10 annual vehicle registration fee on motor vehicles registered in San Francisco and to use the proceeds to fund transportation projects identified in the Expenditure Plan. Revenue collection began in May 2011. Proposition AA revenues must be used to fund projects from the following three programmatic categories. The percentage allocation of revenues designated for each category over the 30-year Expenditure Plan period is shown in parenthesis for the following category name: 1) Street Repair and Reconstruction (50%); 2) Pedestrian Safety (25%); and 3) Transit Reliability & Mobility Improvements (25%). In December 2012, the Transportation Authority Board approved the first Proposition AA Strategic Plan, including the specific projects that could be funded within the first five years (i.e., Fiscal Years 2012-13 to 2016-17). The Proposition AA program is a pay-as-you-go program.

Treasure Island Mobility Management Authority (TIMMA). The Treasure Island Transportation Management Act of 2008 (AB 981) authorizes the creation or designation of a Treasure Island-specific transportation management agency. On April 1, 2014, the City’s Board of Supervisors approved a resolution designating the Transportation Authority as the TIMMA to implement the Treasure Island Transportation Implementation Plan in support of the Treasure Island/Yerba Buena Island Development Project. In September 2014, Governor Brown signed Assembly Bill 141, establishing TIMMA as a legal entity distinct from the Transportation Authority to help firewall the Transportation Authority’s other functions. The eleven members of the Transportation Authority Board act as the Board of Commissioners for TIMMA. The Transportation Authority financial statements include TIMMA as a blended special revenue component unit.

Loan Agreement with Treasure Island Development Authority. In July 2008, the Transportation Authority entered into a loan agreement with the Treasure Island Development Authority (TIDA) for the repayment of project management oversight, engineering and environmental costs for the Yerba Buena Island (YBI) Ramps Improvement Project.

123 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

(13) DETAILED INFORMATION FOR ENTERPRISE FUNDS

(a) San Francisco International Airport San Francisco International Airport (the Airport), which is owned and operated by the City, is the principal commercial service airport for the San Francisco Bay Area. A five-member Commission is responsible for the operation and management of the Airport. The Airport is located 14 miles south of downtown San Francisco in an unincorporated area of San Mateo County, between the Bayshore Freeway (U.S. Highway 101) and the San Francisco Bay. According to the 2015 North American Traffic Report from the Airports Council International (ACI), the Airport is the seventh busiest airport in the United States in terms of passengers and sixteenth in terms of cargo. The Airport is also a major origin and destination point and one of the nation’s principal gateways for Pacific traffic.

Revenue Pledge – The Airport has pledged all of the Net Revenues (as defined in the bond resolutions) to repay the following obligations, in order of priority, (1) the San Francisco International Airport Second Series Revenue Bonds (Senior Bonds), (2) the Subordinate Commercial Paper Notes and any other obligations (Subordinate Bonds) and amounts due to reimburse drawings under the letters of credit securing the Commercial Paper Notes, (3) remaining amounts due to reimburse drawings under the letters of credit securing the Senior Bonds, and (4) interest rate swap termination payments.

During fiscal year 2016, the original principal amount of the Senior Bonds and Commercial Paper Notes issued, principal and interest remaining due on outstanding Senior Bonds and Commercial Paper Notes, principal and interest paid on such obligations, and applicable Net Revenues are as set forth in the table below. There are no unreimbursed drawings under any letter of credit or interest rate swap termination payments due.

Bonds issued with revenue pledge ...... $ 232,075 Bond principal and interest remaining due at end of the fiscal year ...... 6,705,026 Commercial paper issued with subordinate revenue pledge ...... 304,100 Commercial paper principal and interest remaining due at end of the fiscal year ... 343,050 Net revenues ...... 473,086 Bond principal and interest paid in the fiscal year ...... 416,610 Commercial paper principal and interest paid in the fiscal year ...... 3,900

Debt Service Requirement – Under the terms of the 1991 Master Bond Resolution, for a Series of Second Series Revenue Bonds to be secured by the Airport’s parity common account (the Issue 1 Reserve Account), the Airport is required to deposit, with the trustee, an amount equal to the maximum debt service accruing in any year during the life of all Second Series Revenue Bonds secured by the Issue 1 Reserve Account or substitute a credit facility meeting those requirements. Alternatively, the Airport may establish a separate reserve account with a different reserve requirement to secure an individual series of bonds. While revenue bonds are outstanding, the Airport may not create liens on its property essential to operations, may not dispose of any property essential to maintaining revenues or operating the Airport, and must maintain specified insurance.

Under the terms of the 1991 Master Bond Resolution, the Airport has covenanted that it will establish and at all times maintain rentals, rates, fees, and charges for the use of the Airport and for services rendered by the Airport so that:

(a) Net revenues in each fiscal year will be at least sufficient (i) to make all required debt service payments and deposits in such fiscal year with respect to the bonds, any subordinate bonds, and any general obligation bonds issued by the City for the benefit of the Airport and (ii) to make the annual service payment to the City, and (b) Net revenues, together with any transfer from the Contingency Account to the Revenue Account (both held by the City Treasurer), in each fiscal year will be at least equal to 125% of aggregate annual debt service with respect to the bonds for such fiscal year.

124 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

The methods required by the 1991 Master Bond Resolution for calculating debt service coverage differs from GAAP used to determine amounts reported in the Airport’s financial statements.

Passenger Facility Charges – The Airport, as authorized by the Federal Aviation Administration (FAA) pursuant to the Aviation Safety and Capacity Expansion Act of 1990 (the Act), as amended, imposes a Passenger Facility Charge (PFC) of $4.50 for each enplaning passenger at the Airport. Under the Act, air carriers are responsible for the collection of PFC charges and are required to remit PFC revenues to the Airport in the following month after they are recorded by the air carrier. As of June 30, 2016, the FAA has approved several Airport applications to collect and use passenger facility charges (from PFC #2 to PFC #6) in a total cumulative amount of $1.7 billion, with a final charge expiration date estimated to be March 1, 2026. The Airport is working with the FAA to change the expiration date for PFC #3 and the charge effective date for PFC #5 from January 1, 2017 to November 1, 2013, because PFC #3 was fully collected earlier than originally anticipated due to increased passenger levels. For the year ended June 30, 2016, the Airport reported approximately $99.1 million of PFC revenue, which is included in other nonoperating revenues in the accompanying basic financial statements.

Commitments and Contingencies – In addition to the long-term obligations discussed in Note 8, there were $73.2 million of Special Facilities Lease Revenue Bonds outstanding as of June 30, 2016, which financed improvements to the Airport’s aviation fuel storage and delivery system that is leased to SFO Fuel Company LLC (SFO Fuel). SFO Fuel agreed to pay facilities rent to the Airport in an amount equal to debt service payments and required bond reserve account deposits on the bonds. The principal and interest on the bonds will be paid solely from the facilities rent payable by SFO Fuel to the Airport. The Airport assigned its right to receive the facilities rent to the bond trustee to pay and secure the payment of the bonds. Neither the Airport nor the City is obligated in any manner for the repayment of these obligations, and as such, they are not reported in the accompanying financial statements. Rent from Fuel System Lease with SFO Fuel is pledged until the maturity of the SFO Fuel bonds on January 1, 2027, unless additional bonds (including refunding bonds) with a later maturity are issued.

Purchase commitments for construction, material and services as of June 30, 2016 are as follows:

Construction ...... $ 75,769 Operating ...... 15,810 Total ...... $ 91,579

Transactions with Other Funds – Pursuant to the Lease and Use Agreement between the Airport and most of the airlines operating at the Airport, the Airport makes an annual service payment, to the City’s General Fund, equal to 15% of concession revenue (net of certain adjustments), but not less than $5.0 million per fiscal year, in order to compensate the City for all indirect services provided to the Airport. The annual service payment for the year ended June 30, 2016 was $42.5 million and was recorded as a transfer. In addition, the Airport compensates the City’s General Fund for the cost of certain direct services provided by the City to the Airport, including those provided by the Police Department, the Fire Department, the City Attorney, the City Treasurer, the City Controller, the City Purchasing Agent and other City departments. The cost of direct services paid for by the Airport for the year ended June 30, 2016 was $140.7 million.

Business Concentrations - In addition to the Lease and Use Agreements with the airlines, the Airport leases facilities to other businesses to operate concessions at the Airport. For the fiscal year ended June 30, 2016, revenues realized from the following Airport tenant exceeded five percent of the Airport’s total operating revenues:

United Airlines ...... 23.5%

125 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

(b) Port of San Francisco A five-member Port Commission is responsible for the operation, development, and maintenance activities of the Port of San Francisco (Port). In February 1969, the Port was transferred in trust to the City under the terms and conditions of State legislation (“Burton Act”) ratified by the electorate of the City. Prior to 1969, the Port was operated by the State of California. The State retains the right to amend, modify or revoke the transfer of lands in trust provided that it assumes all lawful obligations related to such lands.

Pledged Revenues – The Port’s revenues, derived primarily from property rentals to commercial and industrial enterprises and from maritime operations, which include cargo, ship repair, fishing, harbor services, cruise and other maritime activities, are held in a separate enterprise fund and appropriated for expenditure pursuant to the budget and fiscal provisions of the City Charter, consistent with trust requirements. Under public trust doctrine, the Burton Act, and the transfer agreement between the City and the State, Port revenues may be spent only for uses and purposes of the public trust.

The Port pledged future net revenues to repay its revenue bonds. Annual principal and interest payments through 2044 are expected to require less than 13% of net pledged revenues as calculated in accordance with the bond indenture. The total principal and interest remaining to be paid on the bonds is $95.6 million. The principal and interest payments made in 2016 were $4.2 million and pledged revenues (total net revenues calculated in accordance with the bond indenture) for the year ended June 30, 2016 were $33.3 million.

The Port has entered into a loan agreement with the California Department of Boating and Waterways for $3.5 million to finance certain Hyde Street Harbor improvements. The loan is subordinate to all bonds payable by the Port and is secured by gross revenues as defined in the loan agreement. Total principal and interest remaining to be paid on this loan is $3.0 million. Annual principal and interest payments were $0.23 million in 2016 and pledged harbor revenues were $0.14 million for the year ended June 30, 2016.

Commitments and Contingencies – The Port is presently planning various development and capital projects that involve a commitment to expend significant funds. As of June 30, 2016, the Port had purchase commitments for construction-related services, materials and supplies, and other services were $15.1 million for capital projects and $2.6 million for general operations.

Under an agreement with the San Francisco Bay Conservation and Development Commission (BCDC), the Port is committed to fund and expend up to $30.0 million over a 20-year period for pier removal, parks and plazas, and other public access improvements. As of June 30, 2016, $47.2 million of Port funds have been appropriated and $46.6 million expended for projects under the agreement. In addition to work directly funded by the Port, the deck and pilings that form the valley between Piers 15 and 17 and a portion on non-historic sheds were removed as part of the construction work completed by The Exploratorium project.

Transactions with Other Funds – The Port receives from, and provides services to, various City departments. In 2016, the $19.1 million in services provided by other City departments included $2.9 million of insurance premiums and $0.5 million in workers’ compensation expense.

Pursuant to a memorandum of understanding dated August 31, 2015, a jurisdiction transfer from the Port to the San Francisco Real Estate Division of property commonly known as Daggett Street was completed to facilitate an open space improvement in connection with an adjacent residential development project. In fiscal year 2016 and in connection with all secured approvals, the Port received a transfer fee of $1,675,000.

General Obligation Bonds for Parks – The San Francisco Clean and Safe Neighborhood Parks Bond general obligation bond issued in 2012 included $34.5 million and in 2008 $33.5 million for funding

126 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands) allocated for parks and open space projects on Port property. In February 2016, the Port received $13.2 million of proceeds from the 2012 bond and $8.5 million from the 2008 bond for waterfront projects. Certain of these projects are in progress at June 30, 2016.

South Beach Harbor Project Obligations – A portion of the Rincon Point South Beach Redevelopment Project Area is within the Port Area and the former Redevelopment Agency held leasehold interests to certain Port properties. In 2015, the Port and the Office of Community Investment and Infrastructure, Successor Agency to the Redevelopment Agency, completed discussions concerning the transition, termination of Port agreements, and the transfer of operations, assets, and certain associated obligations. The resultant memorandum of agreement has received essential approvals and is in executory status, pending the completion of several closing conditions.

South Beach Harbor revenues are pledged to a 1986 revenue bond issue that pre-dates the Port’s 2010 Revenue Bonds. South Beach Harbor project funds, including certain tax increments, are available to pay current debt service. Under BCDC Permit Amendment No. 17 for the South Beach Harbor Project, certain public access and other improvements must be completed by December 31, 2017. Construction estimates prepared by a Port consultant in 2014 indicate that this uncompleted work would cost approximately $7.9 million, including certain structural repairs, soft costs and recommended contingencies.

Pollution Remediation Obligations – The Port’s financial statements include liabilities, established and adjusted periodically, based on new information, in accordance with applicable GAAP, for the estimated costs of compliance with environmental laws and regulations and remediation of known contamination. As future development planning is undertaken, the Port evaluates its overall provisions for environmental liabilities in conjunction with the nature of future activities contemplated for each site and accrues a liability, if necessary. It is, therefore, reasonably possible that in future reporting periods current estimates of environmental liabilities could materially change.

Port lands are subject to environmental risk elements typical of sites with a mix of light industrial activities dominated by transportation, transportation-related and warehousing activities. Due to the historical placement of fill of varying quality, and widespread use of aboveground and underground tanks and pipelines containing and transporting fuel, elevated levels of petroleum hydrocarbons and lead are commonly found on Port properties. Consequently, any significant construction, excavation or other activity that disturbs soil or fill material may encounter hazardous materials and/or generate hazardous waste.

A 65-acre area commonly known as “Pier 70” has been used for over 150 years for iron and steel works, ship building and repair, and other heavy industrial operations. Much of the site was owned and/or occupied by the U.S. Navy or its contractors for at least 60 years. A long history of heavy industrial use has turned this area into a “brownfield” – an underutilized property area where reuse is hindered by actual or suspected contamination. Fifteen acres remain occupied by an on-going ship repair facility. Environmental conditions exist that require investigation and remediation prior to any rehabilitation or development for adaptive reuse. The lack of adequate information about environmental conditions has hindered previous development proposals for Pier 70.

Investigation work completed in 2011 reduced the uncertainty regarding the nature and extent of contamination, potential need for remediation, and costs associated with implementation of a risk management plan. The Regional Water Quality Control Board approved the Risk Management Plan in January 2014. The Risk Management Plan provides institutional controls (e.g. use restrictions, health and safety plans) and engineering controls (e.g. capping contaminated soil) to protect current and future users and prevent adverse impact to the environment. The Risk Management Plan specifies how future development, operation, and maintenance will implement the remedy, by covering existing site soil with buildings, streets, plazas, hardscape or new landscaping, thereby minimizing or eliminating exposure to contaminants in soil.

127 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Previous investigation of the northeast shoreline of Pier 70, in an area for development as the future “Crane Cove Park”, found that near-shore sediment is contaminated with metals, petroleum hydrocarbons and polychlorinated biphenyls at concentrations that pose a potential risk to human health or the environment, and will likely require removal or capping of sediment before development of the area for public access and recreation. The accrued cost for pollution remediation at Pier 70, including Crane Cove Park, is estimated at $11.0 million at June 30, 2016.

Other environmental conditions on Port property include asbestos and lead paint removal and oil contamination. The Port may be required to perform certain clean-up work if it intends to develop or lease such property, or at such time as may be required by the City or State.

A summary of environmental liabilities, included in noncurrent liabilities, at June 30 2016, is as follows:

Environmental Monitoring and Remediation Compliance Total Environmental liabilities at July 1, 2015$ 10,703 $ 71 $ 10,774 Current year claims and changes in estimates 266 1 267 Vendor payments - (12) (12) Environmental liabilities at June 30, 2016$ 10,969 $ 60 $ 11,029

The San Francisco Water Enterprise (Water Enterprise) was established in 1930. The Water Enterprise, which consists of a system of reservoirs, storage tanks, water treatment plants, pump stations, and pipelines, is engaged in the collection, transmission and distribution of water to the City and certain suburban areas. In fiscal year 2016, the Water Enterprise sold water, approximately 62,501 million gallons annually, to a total population of approximately 2.6 million people who reside primarily in four Bay Area counties (San Francisco, San Mateo, Santa Clara and Alameda).

The San Francisco Public Utilities Commission (Commission), established in 1932, provides the operational oversight for the Water Enterprise, Hetch Hetchy Water and Power (Hetch Hetchy), and the San Francisco Wastewater Enterprise. Under Proposition E, the City’s Charter Amendment approved by the voters in June 2008, the Mayor nominates candidates subject to qualification requirements to the Commission and the Board of Supervisors votes to approve the nominees by a majority (at least six members).

Pledged Revenues – The Water Enterprise has pledged future revenues to repay various bonds. Proceeds from the revenue bonds provided financing for various capital construction projects and to refund previously issued bonds. These bonds are payable solely from revenues of the Water Enterprise and are payable through fiscal year 2051.

The original amount of revenue bonds issued, total principal and interest remaining, principal and interest paid during 2016 and applicable revenues for 2016 are as follows:

Bonds issued with revenue pledge ...... $ 4,288,095 Bond principal and interest remaining due at end of the fiscal year ...... 7,599,211 Net revenues ...... 229,160* Bond principal and interest paid in the fiscal year ...... 219,195 Funds available for revenue debt service ...... 391,893

*Net revenues included appropriated available funds.

128 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

During fiscal year 2016, the wholesale revenue requirement, net of adjustments, charged to wholesale customers was $209.1 million. Such amounts are subject to final review by wholesale customers, along with a trailing wholesale balancing account compliance audit of the wholesale revenue requirement calculation. As of June 30, 2016, the City owed the Wholesale Customers $21.5 million under the Water Supply Agreement.

Commitments and Contingencies – As of June 30, 2016, the Water Enterprise had outstanding commitments with third parties of $283.3 million for various capital projects and for materials and supplies.

Environmental Issue – As of June 30, 2016, the total pollution remediation liability was $3.0 million, consisting of $1.7 million for the excavation of contaminated soil that contained polycyclic aromatic hydrocarbons from a gun club site in the Lake Merced area, $1.2 million for the 17th and Folsom site and $0.1 million for the Pulgas Dechloramination Facility and the Harry Tracy Water Treatment Plant.

Transactions with Other Funds – The Water Enterprise purchases water from Hetch Hetchy Water and electricity from Hetch Hetchy Power at market rates. These amounts, totaling approximately $36.6 million and $8.3 million, respectively, for the year ended June 30, 2016, are included in the operating expenses for services provided by other departments in the Water Enterprise’s financial statements.

A variety of other City departments provide services such as engineering, purchasing, legal, data processing, telecommunications, and human resources to the Water Enterprise and charge amounts designed to recover those departments’ costs. These charges total approximately $16.0 million for the year ended June 30, 2016 and have been included in services provided by other departments.

(d) Hetch Hetchy Water and Power Enterprise San Francisco Hetch Hetchy Water and Power was established as a result of the Raker Act of 1913, which granted water and power resources rights-of-way on the Tuolumne River in Yosemite National Park and Stanislaus National Forest to the City. Hetch Hetchy is a stand-alone enterprise comprised of two funds, Hetch Hetchy Power and Hetch Hetchy Water, a portion of the Water Enterprise’s operations, specifically the up-country water supply and transmission service for the latter. Hetch Hetchy accounts for the activities of Hetch Hetchy Water and Power and is engaged in the collection and conveyance of approximately 85% of the City’s water supply and in the generation and transmission of electricity from that resource, as well as the City Power services including energy efficiency and renewables. The CleanPowerSF, launched in May 2016, provides green electricity from renewable sources to residential and commercial customers in San Francisco and is reported as part of Hetch Hetchy Power.

Approximately 70% of the electricity generated by Hetch Hetchy Power is used to provide electric service to the City’s municipal customers (including the San Francisco Municipal Transportation Agency, Recreation and Parks Department, the Port of San Francisco, the San Francisco International Airport and its tenants, San Francisco General Hospital, street lights, Moscone Convention Center, and the Water and Wastewater Enterprises). The majority of the remaining 30% balance of electricity is sold to other utility districts, such as the Turlock and Modesto Irrigation Districts (the Districts). As a result of the 1913 Raker Act, energy produced above the City’s Municipal Load is sold first to the Districts to cover their pumping and municipal load needs and any remaining energy is either sold to other municipalities and/or government agencies (not for resale) or sold into the California Independent System Operator (CAISO). Hetch Hetchy operation is an integrated system of reservoirs, hydroelectric power plants, aqueducts, pipelines, and transmission lines.

Hetch Hetchy also purchases wholesale electric power from various energy providers that are used in conjunction with owned hydro resources to meet the power requirements of its customers. Operations and business decisions can be greatly influenced by market conditions, State and Federal power matters before the California Public Utilities Commission (CPUC), the CAISO, and the Federal Energy

129 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Regulatory Commission (FERC). Therefore, Hetch Hetchy serves as the City’s representative at CPUC, CAISO, and FERC forums and continues to monitor regulatory proceedings.

Segment Information – Hetch Hetchy Power issued debt to finance its improvements. Both the Hetch Hetchy Water fund and the Hetch Hetchy Power fund are reported for in a single enterprise (i.e., Hetch Hetchy Water and Power Enterprise). CleanPowerSF is presented as part of Hetch Hetchy Power. However, investors in the debt rely solely on the revenue generated by the individual activities for repayment. Summary financial information for Hetch Hetchy is presented below:

Condensed Statements of Net Position Hetch Hetchy Hetch Hetchy Water Power Total Assets: Current assets……………………………………………$ 35,353 $ 178,127 $ 213,480 Receivables from other funds and component units…. - 12,875 12,875 Noncurrent restricted cash and investments…………. 1,669 40,757 42,426 Other noncurrent assets………………………………… 173 1,608 1,781 Capital assets…………………………………………… 113,867 290,382 404,249 Total assets…………………………………………… 151,062 523,749 674,811

Deferred outflows of resources related to pensions 3,746 4,578 8,324

Liabilities: Current liabilities…………………………………………. 4,638 26,574 31,212 Noncurrent liabilities…………………………………….. 23,554 107,077 130,631 Total liabilities………………………………………….. 28,192 133,651 161,843

Deferred inflows of resources related to pensions 3,905 4,773 8,678

Net position: Net investment in capital assets……………………….. 113,867 255,897 369,764 Restricted for captial projects………………………….. 1,409 - 1,409 Restricted for debt service……………………………… - 306 306 Unrestricted……………………………………………… 7,435 133,700 141,135 Total net position………………………………………$ 122,711 $ 389,903 $ 512,614

130 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Condensed Statements of Revenues, Expenses, Hetch Hetchy Hetch Hetchy and Changes in Fund Net Position Water Power Total Operating revenues…………………………………………… $ 38,742 $ 125,994 $ 164,736 Depreciation expense……………………………………….. (3,874) (12,639) (16,513) Other operating expenses…………………………………… (32,662) (99,320) (131,982) Operating income………………………………………… 2,206 14,035 16,241 Nonoperating revenues (expenses):………………………… Interest and investment income (loss)………………… (38) 1,318 1,280 Interest expense…………………………………………. - (3,355) (3,355) Other nonoperating revenues …………………………. 132 10,702 10,834 Transfers in (out), net………………………………………… - 680 680 Change in net position………………………………………. 2,300 23,380 25,680 Net position at beginning of year, as restated……………. 120,411 366,523 486,934 Net position at end of year………………………………….. $ 122,711 $ 389,903 $ 512,614

Condensed Statements of Cash Flows Hetch Hetchy Hetch Hetchy Water Power Total Net cash provided by (used in): Operating activities……………………………………. $ 6,245 $ 26,911 $ 33,156 Noncapital financing activities……………………….. 132 10,135 10,267 Capital and related financing activities……………… (15,558) (36,948) (52,506) Investing activities…………………………………….. 9 (1,258) (1,249) Decrease in cash and cash equivalents……………….. (9,172) (1,160) (10,332) Cash and cash equivalents at beginning of year………. 45,539 202,257 247,796 Cash and cash equivalents at end of year……………… $ 36,367 $ 201,097 $ 237,464

Pledged Revenues – Hetch Hetchy Power has pledged future power revenues to repay the 2008 Clean Renewable Energy Bonds (CREBs), the 2011 Qualified Energy Conservation Bonds (QECBs), the 2012 New Clean Renewable Energy Bonds (NCREBs), and the 2015 NCREBs. Additionally, Hetch Hetchy Power has pledged future power revenues for 2015 Series AB power revenue bonds. Proceeds from the bonds provided financing for various capital construction and facility energy efficiency projects. The Series 2015 AB power revenue bonds are payable through fiscal year 2046 and are solely payable from net revenues of Hetch Hetchy Power on a senior lien basis to the 2008 CREBs, the 2011 QECBs, the 2012 NCREBs, and the 2015 NCREBs.

The original amount of revenue bonds issued, total principal and interest remaining, principal and interest paid, during 2016, and applicable revenues for 2016 are as follows:

Hetch Hetchy Power (excluding CleanPowerSF) Bonds issued with revenue pledge ...... $ 64,871 Bond principal and interest remaining due at end of the fiscal year ...... 95,688 Net revenues ...... 19,070 Bond principal and interest paid in the fiscal year ...... 2,014 Funds available for revenue debt service ...... 33,044

131 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Commitments and Contingencies – As of June 30, 2016, Hetch Hetchy Water and Power had outstanding commitments with third parties of $63.6 million for various capital projects and other purchase agreements for materials and services.

Hetch Hetchy Water To meet certain requirements of the Don Pedro Reservoir operating license, the City entered into an agreement with the Modesto Irrigation District (MID) and Turlock Irrigation District (TID) in which they would be responsible for an increase in water flow releases from the reservoir in exchange for annual payments from the City. Total payments were $4.7 million in fiscal year 2016. The payments are to be made for the duration of the license, but may be terminated with one year’s prior written notice after 2001. The City and the Districts have also agreed to monitor the fisheries, in the lower Tuolumne River, for the duration of the license. A maximum monitoring expense of $1.4 million is to be shared between the City and the Districts over the term of the license. The City’s share of the monitoring costs is 52% and the Districts are responsible for 48% of the costs.

Hetch Hetchy Power In April 1988, Hetch Hetchy Power entered into two separate long-term power sales agreements (the Agreement) with the two irrigation districts, the MID and TID, which expired June 30, 2015. In April 2015, the Commission and the Board of Supervisors approved the extension of both agreements for one year to June 30, 2016. A second extension agreement has been subsequently approved to continue the current terms and conditions for MID through June 30, 2017. The second extension agreement for TID proposes to remove the district’s rights to excess energy from the project and terminate those conditions with the first extension agreement on June 30, 2016. The Commission will continue to comply with the Raker Act by making Hetch Hetchy generated hydropower available at cost to MID and TID for their agricultural pumping and municipal loads as energy from the Hetch Hetchy project is available after meeting the Commission’s municipal load obligations.

For fiscal year 2016, energy sales to the Districts totaled 377,981 Megawatt hours (MWh) or $13.7 million.

In 1987, the City entered into an interconnection agreement with PG&E to provide transmission, distribution, and other support services for the City’s use of PG&E’s transmission and distribution system to deliver power to the City’s customers. The renegotiated agreement in 2007 expired on July 1, 2015. In December 2014, PG&E filed several separate replacement service and facilities agreements with the FERC for its approval. By FERC order, the City is currently taking transmission service on PG&E’s transmission system using the CAISO Open-Access Transmission Tariff and is taking distribution service under PG&E’s Wholesale Distribution Tariff pursuant to PG&E’s replacement agreements, but subject to waiver of certain terms and conditions and subject to refund by PG&E, pending the FERC’s final decision. During fiscal year 2016, Hetch Hetchy Power purchased $4.9 million of transmission, distribution services, and other support services from PG&E under the terms of the replacement agreements and the 1987 Interconnection Agreement.

The Interconnection Agreement with PG&E also contains a contractual provision allowing Hetch Hetchy to bank Hetch Hetchy Power produced in excess of its load obligations, with a maximum of 110,000 MWh. At June 30, 2016, the balance in the bank was zero MWh, or $0. The banking provisions expired with the expiration of the Interconnection Agreement and have not been replaced; power produced in excess of the City’s load obligations is sold to third parties eligible to purchase such power under the Raker Act.

In January 2016, Hetch Hetchy Power entered into an Irrevocable Direct-Pay Letter of Credit with J.P. Morgan Chase in an aggregate amount of $17.0 million. The Letter of Credit guarantees payment of any termination payment obligations of CleanPowerSF pursuant to the aforementioned Power Purchase Agreements. The Letter of Credit is secured by Hetch Hetchy Power revenue at the 11th lien level under the Hetch Hetchy Power Indenture.

132 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Hetch Hetchy is exposed to risks that could negatively impact its ability to generate net revenues to fund operating and capital investment activities. Hydroelectric generation facilities in the Sierra Nevada are the primary source of electricity for Hetch Hetchy. For this reason, the financial results of Hetch Hetchy are sensitive to variability in watershed hydrology and market prices for energy.

CleanPowerSF CleanPowerSF launched in May 2016 and entered into contracts with Calpine Energy Services L.P. (Calpine) and Shiloh I Wind Project LLC (Shiloh) to purchase renewable and conventional energy and resource adequacy capacity to meet its retail sales obligations. Both contracts feature 10-year master agreements under which multiple transactions may be executed. CleanPowerSF has executed two multi-year transactions with Calpine (three-year term) and Shiloh (five-year term). The Calpine transaction requires a reserve balance equivalent to two months’ worth of estimated payment obligations. At June 30, 2016, total electricity purchased from Calpine and Shiloh was $1.6 million.

CleanPowerSF entered into contract with Noble Americas in November 2015 for a three-year term, not to exceed $5.6 million to provide administrative and customer care services related to electricity data management, billing, call center and related services. During fiscal year 2016, amount paid was $0.024 million and included in Hetchy Power’s start-up costs for CleanPowerSF.

Transactions with Other Funds – The Water Enterprise purchases water from Hetch Hetchy Water and power from Hetch Hetchy Power. Included in the operating revenues are the water assessment fees totaling $36.6 million and purchased electricity for $8.3 million for the year ended June 30, 2016. In addition, the Wastewater Enterprise purchases power from Hetch Hetchy Power totaling $9.9 million for the year ended June 30, 2016. Included in 2016 operating revenues are sales of power to departments within the City of $84.3 million.

A variety of other City departments provide services such as engineering, purchasing, legal, data processing, telecommunications, and human resources to Hetch Hetchy Water and Power and charge amounts designed to recover those departments’ costs. These charges total approximately $9.5 million for the year ended June 30, 2016 and have been included in services provided by other departments.

(e) San Francisco Municipal Transportation Agency

The San Francisco Municipal Transportation Agency (SFMTA) is governed by the SFMTA Board of Directors who are appointed by the Mayor and Board of Supervisors. The SFMTA financial statements include the entire San Francisco’s (the City’s) surface transportation network that encompasses pedestrians, bicycling, transit (Muni), traffic and off and on street parking, regulation of the taxi industry, and three nonprofit parking garage corporations operated by separate nonprofit corporations, whose operations are interrelated. All significant inter-entity transactions have been eliminated.

The SFMTA was established by voter approval of the addition of Article VIIIA to the Charter of the City (the “Charter”) in 1999 (Proposition E). The purpose of the Charter amendment was to consolidate all surface transportation functions within a single City department, and to provide the Transportation System with the resources, independence and focus necessary to improve transit service and the City's transportation system. The voters approved additional Charter amendments: (1) in 2007 (Proposition A), which increased the autonomy of and revenues to the SFMTA; (2) in 2010 (Proposition G), which increased management flexibility related to labor contracts; (3) in 2014 (Proposition A), which approved $500 million in General Obligation Bonds for transportation and street infrastructure, and (4) in 2014 (Proposition B), which increases General Fund allocation to SFMTA based on the City’s population increase.

Muni is one of America’s oldest public transit agencies, the largest in the Bay Area and seventh largest system in the United States. It currently carries more than 222 million boardings annually. Operating

133 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands) historic streetcars, modern light rail vehicles, diesel buses, alternative fuel vehicles, electric trolley coaches, and the world famous cable cars, Muni’s fleet is among the most diverse in the world.

The SFMTA’s Sustainable Streets initiates and coordinates improvements to City’s streets, transit, bicycles, pedestrians, and parking infrastructure. It manages 19 City-owned garages and 19 metered parking lots. In March 2009, the former Taxi Commission was merged with the SFMTA, which then has assumed responsibility for taxi regulation to advance industry reforms.

Three nonprofit corporations provide operational oversight to four parking garages: Japan Center, Sutter-Stockton, Union Square, and Portsmouth. Of these four parking garages, Union Square and Portsmouth are owned by the City’s Recreation and Park Department but managed by the SFMTA. The activities of these parking garages are accounted for in SFMTA’s parking garage accounts.

Pledged Revenue – In 2007, San Francisco voters approved Proposition A, which authorized the SFMTA to issue revenue bonds and other forms of indebtedness without further voter approval but with approval by the SFMTA Board of Directors and concurrence by the Board of Supervisors. The SFMTA has pledged future revenues to repay various bonds. Proceeds from the revenue bonds provided financing for various capital construction projects and to refund previously issued bonds. These bonds are payable from all SFMTA revenues except for City General Fund allocations and restricted sources and are payable through the fiscal year 2044.

Annual principal and interest payments for fiscal year 2016 were 29.5% of funds available for revenue bond debt service. The original amount of revenue bonds issued, total principal and interest remaining, principal and interest paid during 2016 and applicable revenues are as follows:

Bonds issued with revenue pledge ...... $ 209,840 Bond principal and interest remaining due at end of the fiscal year ...... 311,365 Net revenues ...... 39,405 Bond principal and interest paid in the fiscal year ...... 16,495 Funds available for revenue debt service ...... 55,900

Operating and Capital Grants and Subsidies – The City’s Annual Appropriation Ordinance provides funds to subsidize the operating deficits of SFMTA and Sustainable Streets as determined by the City’s budgetary accounting procedures and subject to the appropriation process. The amount of General Fund subsidy to the SFMTA was $381.3 million in fiscal year 2016. The General Fund subsidy includes a total revenue baseline transfer of $284.7 million, as required by the City Charter, $68.9 million from an allocation of the City’s parking tax. Proposition B, approved by the voters in November 2014, provides additional City General Funds to address transportation needs tied to the City population growth. In fiscal year 2016, SFMTA received $27.7 million from this source.

The SFMTA receives capital grants from various federal, state, and local agencies to finance transit- related property and equipment purchases. As of June 30, 2016, the SFMTA had approved capital grants with unused balances amounting to $906.4 million. Capital grants receivable as of June 30, 2016 totaled $136.1 million.

The SFMTA also receives operating assistance from various federal, state, and local sources, including Transit Development Act funds, diesel fuel, and sales tax allocations. As of June 30, 2016, the SFMTA had various operating grants receivable of $30.7 million. In fiscal year 2016, the SFMTA’s operating assistance from BART’s Americans with Disability Act (ADA) related support of $1.6 million, and other federal, state, and local grants of $8.5 million, to fund project expenses that are operating in nature.

Proposition 1B is a ten-year $20 billion transportation infrastructure bond that was approved by state voters in November 2006. The bond measure was composed of several funding programs including the Public Transportation Modernization, Improvement and Service Enhancement Account program

134 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

(PTMISEA) and the Transit Security & Safety Account that are funding solely for public transit projects. The SFMTA received cash totaling $12.6 million in fiscal year 2016 for different projects. Proposition 1B funds do not require matching funds. The original legislation required funds to be obligated within three years of the date awarded. SB87 extended the date to June 30, 2016 for funds awarded between fiscal years 2008 and 2010. The Budget Act of 2013 further extended the date to June 30, 2018. The eligibility requirements for the PTMISEA program include rehabilitation of infrastructure, procurement of equipment and rolling stock, and investment in expansion projects. During fiscal year 2016, $69.7 million in drawdowns were made from the funds for various eligible projects costs.

Commitments and Contingencies – The SFMTA has outstanding contract commitments of approximately $567.2 million with third parties, for various capital projects. Grant funding is available for a majority of this amount. The SFMTA also has outstanding commitments of approximately $53.1 million with third parties for non-capital expenditures. Various local funding sources are used to finance these expenditures. The SFMTA is also committed to numerous capital projects for which it anticipates that federal and state grants will be the primary source of funding.

Leveraged Lease-Leaseback of BREDA Vehicles – Tranches 1 and 2 In April 2002 and in September 2003, following the approval of the Federal Transit Administration, SFMTA Board of Directors, and the City’s Board of Supervisors, Muni entered into separate leveraged lease leaseback transactions for over 118 and 21 Breda light rail vehicles (the Tranche 1 and Tranche 2 Equipment, respectively, and collectively, the “Equipment”). Each transaction, also referred to as a “sale in lease out” or “SILO”, was structured as a head lease of the Equipment to a special purpose trust and a sublease of the Equipment back from such trust. Under the respective sublease, Muni may exercise an option to purchase the Tranche 1 Equipment on specified dates between November 2026 through January 2030 and Tranche 2 Equipment in January 2030, in each case, following the scheduled sublease expiration dates. During the terms of the subleases, Muni maintains custody of the Equipment and is obligated to insure and maintain the Equipment.

Muni received an aggregate of $388.2 million and $72.6 million, respectively in 2002 and 2003, from the equity investors in full prepayment of the head leases. Muni deposited a portion of the prepaid head lease payments into separate escrows that were invested in U.S. agency securities with maturities that correspond to the purchase option dates for the Equipment as specified in each sublease. Muni also deposited a portion of the head lease payments with a debt payment undertaker whose repayment obligations are guaranteed by Assured Guaranty Municipal Corp. (AGM) as successor to Financial Security Assurance (FSA), a bond insurance company, that was rated “AAA” by Standard & Poor’s (“S&P”) and “Aaa” by Moody’s Investor Services (“Moody’s”) at the time the Tranche 1 and Tranche 2 Equipment transactions were entered into. Although these escrows do not represent a legal defeasance of Muni’s obligations under the subleases, management believes that these transactions are structured in such a way that it is not probable that Muni will need to access other monies to make sublease payments. Therefore, the assets and the sublease obligations are not recorded on the financial statements of the SFMTA.

As a result of the cash transactions above, Muni recorded $35.5 million and $4.4 million in fiscal year 2002 and 2003 respectively, representing the difference between (a) the amounts received of $388.2 million and $72.6 million, and (b) the amounts of $352.7 million and $67.5 million paid to the escrows, the debt payment undertaker and for certain transaction expenses. These amounts have been classified as deferred inflows of resources in fiscal year 2016 and will be amortized over the life of each sublease unless the purchase option is executed or sublease is otherwise terminated before its expiration date. The deferred inflows of resources amortized amounts were $9.4 million and $2.4 million for the Tranche 1 Equipment and Tranche 2 Equipment in fiscal year 2016.

On March 17, 2014, Muni terminated leveraged lease transactions with respect to 30 items of Tranche 1 Equipment having an initial transaction value of $99.3 million. On May 24, 2016, Muni terminated leveraged lease transactions with respect to 28 items of Tranche 1 Equipment having an initial transaction value of $89.6 million and 21 items of Tranche 2 Equipment having an initial transaction

135 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands) value of $72.6 million. On June 27, 2016, Muni terminated leveraged lease transactions with respect to 31 items of Tranche 1 Equipment having an initial transaction value of $100.4 million. As of June 30, 2016, one leveraged lease transaction with respect to 29 items of Tranche 1 Equipment having an initial transaction value of $98.7 million remains outstanding.

(f) Laguna Honda Hospital General Fund Subsidy - The Laguna Honda Hospital (LHH) is a skilled nursing facility which specializes in serving elderly and disabled residents. The operations of LHH are subsidized by the City’s General Fund. It is the City’s policy to fund operating deficits of the enterprise on a budgetary basis; however, the amount of operating subsidy provided is limited to the amount budgeted by the City. Any amount not required for the purpose of meeting an enterprise fund deficit shall be transferred back to the General Fund at the end of each fiscal year, unless otherwise approved by the Board of Supervisors. For the year ended June 30, 2016, the subsidy for LHH was $51.3 million.

Net Patient Service Revenue - Net patient service revenues are recorded at the estimated net realizable amounts from patients, third-party payors and others for services rendered, including a provision for doubtful accounts and estimated retroactive adjustments under reimbursement agreements with federal and state government programs and other third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods, as final settlements are determined. Patient accounts receivable are recorded net of estimated allowances, which include allowances for contractuals and bad debt. These allowances are based on current payment rates, including per diems, Diagnosis-Related Group (DRG) reimbursement amounts and payment received as a percentage of gross charges.

Third-Party Payor Agreements - LHH has agreements with third-party payors that provide for reimbursement to LHH at amounts different from its established rates. Contractual adjustments under third-party reimbursement programs represent the difference between the hospital’s established rate for services and amounts reimbursed by third-party payors. Medicare and Medi-Cal are the major third- party payors with whom such agreements have been established. Laws and regulations governing the Medicare and Medi-Cal programs are complex and subject to interpretation. LHH believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties and exclusion from the Medicare and Medi-Cal programs.

During the year ended June 30, 2016, LHH’s patient receivables and charges for services were as follows:

Patient Receivables, net Medi-Cal Medicare Other Total

Gross Accounts Receivable$ 81,015 $ 5,034 $ 2,723 $ 88,772 Less: Provision for Contractual Allowances (53,508) (3,324) (1,798) (58,630) Total, net$ 27,507 $ 1,710 $ 925 $ 30,142

Net Patient Service Revenue Medi-Cal Medicare Other Total

Gross Revenue$ 406,764 $ 24,618 $ 13,317 $ 444,699 Less: Provision for Contractual Allowances (212,223) (16,189) (12,613) (241,025) Total, net$ 194,541 $ 8,429 $ 704 $ 203,674

136 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Because Medi-Cal reimbursement rates are less that LHH’s established charges rates, LHH is eligible to receive supplemental federal funding. As of June 30, 2016, LHH recorded $71.3 million of subvention receivable for matching federal funds to local funds.

Unearned Credits and Other Liabilities - As of June 30, 2016, LHH recorded approximately $28.3 million in other liabilities for third-party payor settlements payable.

Transactions with Other Funds – A variety of other City departments provide services such as engineering, purchasing, legal, data processing, telecommunications, human resources, and public protection to LHH and charge amounts designed to recover those departments’ costs. These charges total approximately $10.0 million for the year ended June 30, 2016 and have been included in services provided by other departments.

Commitments and Contingencies – As of June 30, 2016, LHH has entered into various purchase contracts totaling approximately $0.7 million that are related to the old building remodel phase of the Replacement Project.

(g) San Francisco General Hospital General Fund Subsidy - San Francisco General Hospital (SFGH) is an acute care hospital. The operations of SFGH are subsidized by the City’s General Fund. It is the City’s policy to fully fund enterprise operations on a budgetary basis; however, the amount of operating subsidy provided is limited to the amount budgeted by the City. Any amount not required for the purpose of meeting an enterprise fund deficit shall be transferred back to the General Fund at the end of each fiscal year, unless otherwise approved by the Board of Supervisors. For the fiscal year ended June 30, 2016, the subsidy for SFGH was $240.1 million.

Patient accounts receivables are recorded net of estimated allowances, which include allowances for contractuals, bad debt, and administrative write-offs. These allowances are based on current payment rates, including per diems, DRG amounts and payment received as a percentage of gross charges.

Third-Party Payor Agreements - SFGH has agreements with third-party payors that provide for reimbursement to SFGH at amounts different from its established rates. Contractual adjustments under third-party reimbursement programs represent the difference between SFGH's established rates and amounts reimbursed by third-party payors. Major third-party payors with whom such agreements have been established are Medicare, Medi-Cal, and the State of California through the Medi-Cal Hospital/Section 1115 Medicaid Waiver and Short-Doyle mental health programs. Laws and regulations governing the Medicare and Medi-Cal programs are complex and subject to interpretation. SFGH believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigation involving allegations of potential wrongdoing. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties and exclusion from the Medicare and Medi-Cal programs.

137 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

During the year ended June 30, 2016, SFGH’s patient receivables and charges for services were as follows:

Patient Receviables, Net Medi-Cal Medicare Other Total

Gross Accounts Receivable…………………. $ 248,465 $ 124,029 $ 131,638 $ 504,132 Less: Contractual Allowances………………….. (221,716) (113,886) (83,383) (418,985) Provision for Bad Debt……………………… - - (23,061) (23,061) Total, Net Accounts Receivable…………$ 26,749 $ 10,143 $ 25,194 $ 62,086

Patient Service Revenue, Net Medi-Cal Medicare Other Total

Gross Patient Service Revenue………………….$ 1,642,905 $ 685,408 $ 891,771 $ 3,220,084 Less: Contractual Allowances……………………… (1,496,445) (566,949) (361,200) (2,424,594) Bad Debt Write off……………………………. - - (85,868) (85,868) Total, Net Patient Service Revenue…$ 146,460 $ 118,459 $ 444,703 $ 709,622

California’s Section 1115 Medicaid Waiver (Waiver), titled the “Bridge to Health Care Reform” began in November 2010. The Waiver is intended to help sustain the state's Medicaid Program (known as Medi- Cal), test new innovations to help improve care and reduce costs, and to support the safety net in advance of health reform. Under the Waiver, payments for public hospitals are comprised of: 1) fee- for-service cost-based reimbursements for inpatient hospital services; 2) Disproportionate Share Hospital payments; 3) distribution from a pool of federal funding for uninsured care, known as the Safety Net Care Pool (SNCP); 4) Delivery System Reform Incentive Program (DSRIP); and 5) the Low Income Health Program (LIHP). The non-federal share of these payments will be provided by the public hospitals, primarily through certified public expenditures, whereby the hospital would expend its local funding for services to draw down the federal financial participation. Revenues recognized under the Waiver approximated $17.8 million for the year ended June 30, 2016. The DSRIP is a pay-for- performance initiative that challenges public hospital systems to meet specific benchmarks related to improving health care access, quality and safety and outcomes.

The Bridge to Heath Care Reform waiver expired October 31, 2015. On December 30, 2015, the Centers for Medicare and Medicaid Services (CMS) approved Medi-Cal 2020, a five-year renewal of California's Section 1115 Medicaid Waiver, which provides California public hospitals new federal funding through programs that are designed to shift the focus away from hospital-based and inpatient care, towards outpatient, primary and preventative care. A renewal of California's Medicaid Waiver was a fundamental component to public hospital's ability to continue to successfully implement the Affordable Care Act (ACA) beyond the primary step of coverage expansion.

The Medi-Cal 2020 waiver features four new programs: (1) a pay-for-performance delivery system transformation and alignment program that is considered the successor to the 2010 Bridge to Reform waiver's DSRIP, known as PRIME (Public Hospital Redesign and Incentives in Medi-Cal); (2) Global Payment Program (GPP) for services to the uninsured in designated public hospital systems; (3) Whole Person Care Pilot Program which would be a county-based, voluntary program to target providing more integrated care for high-risk, vulnerable populations; and (4) Dental Transformation Incentive Program, an optional incentive program to increase the frequency and quality of dental care provided to children.

138 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Payments received under Medi-Cal 2020 Waiver's GPP are utilization based and not dependent on Certified Public Expenditures (CPEs). However, GPP claims are subject to State and federal audit and final reconciliation. SFGH has established reserves for the uncertainty of future financial impact of potential audit and reconciliation adjustments. Revenues recognized under Medi-Cal 2020 approximated $129.5 million for the fiscal year ended June 30, 2016.

The City submitted an application to participate in the Whole Person Care Pilot Program. The State Department of Health Care Services is reviewing all applications and counties will be notified of their decision in early December 2016.

In addition, SFGH was reimbursed by the State, under the Short-Doyle Program, for mental health services provided to qualifying residents based on an established rate per unit of service not to exceed an annual negotiated contract amount. During the fiscal year ended June 30, 2016, reimbursement under the Short-Doyle Program amounted to approximately $5.4 million and is included in net patient service revenue.

Unearned Credits and Other Liabilities - As of June 30, 2016, SFGH recorded approximately $340 million in unearned credits and other liabilities, which was comprised of $299.2 million in unearned credits mainly related to receipts under DSH/Safety Net Care Pool, the LIHP, and AB915 programs, and $40.8 million in Third Party Settlements payable.

Charity Care - SFGH provides care without charge or at amounts less than its established rates to patients who meet certain criteria under its charity care policy. Charges foregone based on established rates were $216.3 million and estimated costs and expenses to provide charity care were $59.8 million in fiscal year 2016.

Other Revenues – SFGH recognized $52.2 million of realignment funding for the year ended June 30, 2016. With California electing to implement a state-run Medicaid Expansion afforded by the Affordable Care Act, the State anticipates that counties’ costs and responsibilities for the health care services for the indigent population will decrease as much of the population becomes eligible for coverage through Medi-Cal or Covered California. Starting July 1, 2013, there is a mechanism that provides for the State to redirect health realignment funds to fund social service programs. The redirected amount will be determined according to a formula that takes into account a county’s cost and revenue experience and redirects 80% of the savings realized by the county. The State predetermined an amount of health realignment to be redirected of $12 million in FY15-16 for the City and withheld those amounts from health realignment remittances to the City. A reconciliation using actual experience will be concluded within two years after June 30, 2015 for FY14-15 and within two years after June 30, 2016 for FY15-16.

Contracts with the University of California San Francisco – The City contracts on a year-to-year basis on behalf of SFGH with the University of California (UC). Under the contract, SFGH serves as a teaching facility for UC professional staff, medical students, residents, and interns who, in return, provide medical and surgical specialty services to SFGH's patients. The total amount for services rendered under the contract for the year ended June 30, 2016, was approximately $156.9 million.

SFGH Rebuild – In 1994, California passed Senate Bill 1953, mandating that all California acute care hospitals meet new seismic safety standards by 2008 (subsequent legislation has extended the final date to January 1, 2020). In January 2001, the San Francisco Health Commission approved a resolution to support a rebuild effort for the hospitals, and the Department of Public Health conducted a series of planning meetings to review its options. It became evident that rebuilding rather than retrofitting was required, and that rebuilding SFGH presented a unique opportunity for the Department of Public Health to make system-wide as well as structural improvements in its delivery of care for patients.

139 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

In October 2005, the San Francisco Health Commission accepted the Mayor's Blue Ribbon Committee recommendation to rebuild the hospital at its current Potrero Avenue location. A site feasibility study was concluded in September 2006 and showed a compliant hospital can be built on the west lawn without demolishing the historic buildings or other buildings. An institutional master plan, a hazardous materials assessment, a geotechnical analysis and rebuild space program have all been completed in the fiscal year 2007. Schematic design of the new building was completed and the project cost was estimated at $887.4 million. The majority of the funding would be through issuance of bonds. In November 2008, San Francisco voters approved Proposition A, a ballot measure that authorized the City to issue general obligation bonds for the rebuild of the hospital. $887.4 million of General Obligation Bonds were issued to fund the hospital rebuild. The new hospital was constructed and reached substantial completion on August 18, 2015. Patients were moved into the new hospital on May 21, 2016.

The General Obligation Bonds are accounted for as a governmental activity and transactions are accounted for in the City’s Governmental Capital Projects Funds. The new facility is capitalized and also recorded under governmental activities.

Gift – SFGH received a gift in the amount of $5.0 million and $57.4 million, in FY15-16 and FY14-15, respectively, from the San Francisco General Hospital Foundation for the acquisition of furniture, fixtures and equipment (FF&E) for the new hospital. As of June 30, 2016, SFGH has spent $30.5 million from the gift on acquisition of FF&E as stipulated by the donor and recorded the remaining $31.9 million as restricted funds.

Commitments and Contingencies – As of June 30, 2016, SFGH has approximately $4.2 million in commitments for various capital projects.

(h) San Francisco Wastewater Enterprise The San Francisco Wastewater Enterprise (Wastewater Enterprise) was established in 1977, following the transfer of all sewage-system-related assets and liabilities of the City to the Wastewater Enterprise pursuant to bond resolution, to account for the City’s municipal sewage treatment and disposal system.

The Wastewater Enterprise collects, transmits, treats, and discharges sanitary and stormwater flows, generated within the City, for the protection of public health and environmental safety. In addition, the Wastewater Enterprise serves, on a contractual basis, certain municipal customers located outside of the City limits, including the North San Mateo County Sanitation District No. 3, Bayshore Sanitary District, and the City of Brisbane. The Wastewater Enterprise recovers, cost of service, through user fees based on the volume and strength of sanitary flow. The Wastewater Enterprise serves approximately 147,430 residential accounts, which discharge about 15.8 million units of sanitary flow per year (measured in hundreds of cubic feet, or ccf) and approximately 16,151 non-residential accounts, which discharge about 8 million units of sanitary flow per year.

Pledged Revenues – Wastewater Enterprise’s revenues, which consist mainly of sewer service charges, are pledged for the payment of principal and interest on various revenue bonds. Proceeds, from the bonds, provided financing for various capital construction projects and to refund previously issued bonds. These bonds are payable solely from net revenues of Wastewater Enterprise and are payable through fiscal year ending 2047.

140 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

The original amount of revenue bonds issued, total principal and interest remaining, principal and interest paid during fiscal year 2016, applicable net revenues, and funds available for bond debt service are as follows:

Bonds issued with revenue pledge ...... $ 1,072,950 Bond principal and interest remaining due at end of the fiscal year ...... 1,730,167 Net revenues ...... 100,084 Bond principal and interest paid in the fiscal year ...... 60,022 Funds available for revenue debt service ...... 239,931

Commitments and Contingencies – As of June 30, 2016, the Wastewater Enterprise had outstanding commitments, with third parties, for capital projects and for materials and services totaling $190.7 million.

Pollution Remediation Obligations – As of June 30, 2016, the Wastewater Enterprise recorded $2.6 million in pollution remediation liability, consisting of $2 million cleanup cost estimate at the Yosemite Creek site, $0.6 million at the Southeast and Oceanside Treatment sites, and $0.01 million for the hazardous materials at the Southeast plant. The pollution remediation obligation reported in the accompanying statements of net position is based on estimated contractual costs.

Transactions with Other Funds –The Wastewater Enterprise purchases power from Hetch Hetchy Power totaling $9.9 million for the year ended June 30, 2016. A variety of other City departments provide services such as engineering, purchasing, legal, data processing, telecommunications, and human resources to the Wastewater Enterprise and charge amounts designed to recover those departments’ costs. These charges total approximately $26.2 million for the year ended June 30, 2016 and have been included in services provided by other departments.

(14) SUCCESSOR AGENCY TO THE REDEVELOPMENT AGENCY OF THE CITY AND COUNTY OF SAN FRANCISCO

As discussed in Note 1, the financial statements present the Successor Agency and its component unit, an entity for which the Successor Agency is considered to be financially accountable. The City and County of San Francisco Redevelopment Financing Authority (Financing Authority) is a joint powers authority formed between the former Agency and the City to facilitate the long-term financing of the former Agency’s activities. The Financing Authority is included as a blended component unit in the Successor Agency’s financial statements because the Financing Authority provides services entirely to the Successor Agency.

Pursuant to the Redevelopment Dissolution Law, funds that would have been distributed to the former Agency as tax increment, hereafter referred to as redevelopment property tax revenues, are deposited into the Successor Agency’s Redevelopment Property Tax Trust Fund (Trust Fund) administered by the City’s Controller for the benefit of holders of the former Agency’s enforceable obligations and the taxing entities that receive pass-through payments. Any remaining funds in the Trust Fund, plus any unencumbered redevelopment cash and funds from asset sales are distributed by the City to the local agencies in the project area unless needed to pay enforceable obligations.

On May 29, 2013, the California Department of Finance (DOF) granted a Finding of Completion for the Successor Agency. Pursuant to Health and Safety Code (HSC) section 34179.7, the DOF verified that the Successor Agency does not owe any amounts to the taxing entities as determined under HSC section 34179.6, subdivisions (d) or (e) and HSC section 34183.5. With a Finding of Completion, the Successor Agency may proceed with (1) placing loan agreements between the former Agency and the City on the Recognized Obligation Payments Schedule (ROPS) as enforceable obligations, provided the Oversight Board makes a finding that the loan was for legitimate redevelopment purposes per HSC, and (2) utilize proceeds derived from bonds issued prior to January 1, 2011, in a manner consistent with the original bond covenants.

141 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

In addition, the receipt of the Finding of Completion allowed the Successor Agency to submit a Long Range Property Management Plan (LRPMP) to the Oversight Board and the DOF for approval. The LRPMP pertains to the disposition and use of real properties held by the Successor Agency. Part 1 of the LRPMP, which addresses the disposition of property located at 706 Mission Street, was approved by the DOF on October 4, 2013. During fiscal year 2016, the property was transferred in accordance with the terms and closing conditions of the 706 Mission Purchase and Sale Agreement. After incorporating feedback from the DOF, the remainder of the LRPMP was approved by the Oversight Board on November 23, 2015, and by the DOF on December 7, 2015.

In September 2015, the State passed Senate Bill 107 (SB 107) which clarifies and updates existing law governing the dissolution of redevelopment agencies. SB 107 includes specific language that allows the Successor Agency to issue bonds or other indebtedness for the purposes of low and moderate income housing and infrastructure in the City by allowing the pledge of revenues available in the Trust Fund that are not otherwise pledged subject to the approval of the Oversight Board. SB 107 also declares that Mission Bay North, Mission Bay South, Hunters Point Shipyard Phase 1, Candlestick Point - Hunters Point Shipyard Phase 2, and Transbay projects are finally and conclusively approved as enforceable obligations.

(a) Capital Assets Held by the Successor Agency For the year ended June 30, 2016, the summary of changes in capital assets is as follows:

Balance Balance July 1, 2015 Additions Deletions June 30, 2016 Capital assets not being depreciated: Land held for lease$ 54,769 $ - $ - $ 54,769 Construction in progress 633 1,187 - 1,820 Total capital assets not being depreciated 55,402 1,187 - 56,589 Capital assets being depreciated: Furniture and equipment - General 8,144 - - 8,144 Building and improvements 227,843 - (25,791) 202,052 Total capital assets being depreciated 235,987 - (25,791) 210,196 Less accumulated depreciation for: Furniture and equipment (8,093) (11) - (8,104) Building and improvements (95,200) (5,532) 7,272 (93,460) Total accumulated depreciation (103,293) (5,543) 7,272 (101,564) Total capital assets being depreciated, net 132,694 (5,543) (18,519) 108,632 Total capital assets, net$ 188,096 $ (4,356) $ (18,519) $ 165,221

During the year ended June 30, 2016, the Successor Agency sold a property with a book value of $18.5 million to a developer. The purchase price was $37.5 million, of which $25.2 million was used to pay off advances from the City, $8.9 million was used to partially pay off Tax Allocation Bonds Series 2003 B, and $3.3 million was used to pay off Tax Allocation Bonds Series 2014 A. The gain from the sale of the property was recorded as an other addition in the Statement of Changes in Fiduciary Net Position.

142 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

(b) Summary of the Successor Agency’s Long-Term Obligations Final Maturity Remaining Entity and Type of Obligation Date Interest Rate Amount Hotel tax revenue bonds (a) ………………………………… 2025 4.00% - 5.00%$ 34,260 Tax allocation revenue bonds (b) …………………………… 2044 0.57% - 9.00% 804,659 South Beach Harbor Variable Rate Refunding bonds (c) ………………………………………… 2017 3.50% 675 California Department of Boating and Waterways Loan (d) ………………………………………… 2037 4.50% 6,857 Total long-term bonds and loans …………………….. $ 846,451

Debt service payments are made from the following sources: (a) Hotel taxes from the occupancy of guest rooms in the hotels within the City. (b) Redevelopment property tax revenues from the Bayview Hunters Point, Western Addition, Rincon Point South Beach, Yerba Buena Center, India Basin, South of Market, Golden Gateway, Mission Bay South, Transbay, and Mission Bay North project areas. (c) South Beach Harbor Project cash reserves, redevelopment property tax revenues, and project revenues transferred from the capital projects fund. (d) South Beach Harbor Project revenues (subordinated to Refunding Bonds).

Issuance of Successor Agency Bonds – On December 24, 2013, the DOF released its letter approving the issuance of bonds by the Successor Agency. On April 21, 2016, the Successor Agency issued two refunding bonds, Tax Allocation Refunding Bonds Series 2016 A (2016 Series A Bonds) for $73.9 million and Tax Allocation Refunding Bonds Series 2016 C (2016 Series C Bonds) for $73.2 million and one new issuance, Mission Bay South Redevelopment Project Series 2016 B (2016 Series B Bonds) for $45.0 million.

Proceeds from the 2016 Series A Bonds plus original issue premium of $15.6 million and funds on hand from the refunded bonds of $17.3 million were used to fully refund 2005 Series D, 2006 Series B, 2009 Series C, and 2011 Series C bonds in the amount of $12.9 million, $29.5 million, $25.3 million, and $25.7 million, respectively, plus accrued interest and issuance costs. The refunding resulted in net present value savings of $19.6 million and an accounting loss of $11.5 million. The 2016 Series A Bonds bear fixed interest rates of 3.00% to 5.00% and reach final maturity on August 1, 2041.

Proceeds from the 2016 Series C Bonds of $73.2 million plus original issue premium of $13.9 million and funds on hand from the refunded bonds in the amount of $11.3 million were used to fully refund 2009 Series D Bonds and 2011 Series D Bonds in the amount of $45.0 million and $34.9 million, respectively, plus accrued interest and issuance costs. The refunding resulted in net present value savings of $15.9 million and an accounting loss of $17.2 million. The 2016 Series C Bonds bear fixed interest rates of 2.00% to 5.00% and reach final maturity on August 1, 2041.

Proceeds from the 2016 Series B Bonds plus original issue premium of $8.4 million will be used to finance redevelopment activities of the Successor Agency within or of benefit to the Mission Bay South Redevelopment Project Area. The 2016 Series B Bonds bear fixed interest rate of 2.00% to 5.00% and reach final maturity on August 1, 2043.

143 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Pledged Revenues for Bonds – The Tax Allocation Bonds are equally and ratably secured by the pledge and lien of the redevelopment property tax revenues (i.e., the former tax increment). These revenues have been pledged until the year 2044, the final maturity date of the bonds. The total principal and interest remaining on these bonds is approximately $1.46 billion. The redevelopment property tax revenues recognized during the year ended June 30, 2016, were $119.3 million against the total debt service payment of $97.9 million.

The Hotel Tax Revenue Bonds are secured by the pledge and lien of the hotel tax revenue received by the Successor Agency from the City. These revenues have been pledged until the year 2026, the final maturity of the bonds. The total principal and interest remaining on the Hotel Tax Revenue Bonds is approximately $43.1 million. The hotel tax revenue recognized during the year ended June 30, 2016 was $5.0 million which equaled the total debt service payment.

The changes in long-term obligations for the Successor Agency for the year ended June 30, 2016, are as follows:

Additional Obligations, Current Interest Maturities, Accretion Retirements, July 1, and Net and Net June 30, 2015 Increases Decreases 2016 Bonds payable: Tax revenue bonds ...... ……$ 889,174 $ 192,120 $ (241,700) $ 839,594 Less unamortized amounts: For issuance premiums ...... 13,558 37,924 (1,701) 49,781 For issuance discounts ...... (4,365) - 1,417 (2,948) Total bonds payable ...... 898,367 230,044 (241,984) 886,427

Accreted interest payable………………………… 37,501 4,714 - 42,215 (1) Notes, loans, and other payables...... 7,075 - (218) 6,857 Accrued vacation and sick leave pay…………… 639 349 (87) 901 Other postemployment benefits obligation……… 833 796 (1,199) 430 Successor Agency - long term obligations… $ 944,415 $ 235,903 $ (243,488) $ 936,830

______(1) Amounts represent interest accretion Capital Appreciation Bonds.

144 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

As of June 30, 2016, the debt service requirements to maturity for the Successor Agency, excluding accrued vacation and sick leave, are as follows:

Fiscal Year Tax Revenue Other Long-Term Ending Bonds Obligations Total June 30 Principal Interest* Principal Interest Principal Interest 2017...... $ 48,230 $ 41,523 $ 227 $ 309 $ 48,457 $ 41,832 2018...... 51,465 41,453 238 298 51,703 41,751 2019...... 61,815 38,958 248 288 62,063 39,246 2020...... 46,477 39,463 260 276 46,737 39,739 2021...... 32,507 38,243 271 265 32,778 38,508 2022-2026..... 152,303 199,386 1,550 1,130 153,853 200,516 2027-2031..... 132,422 132,443 1,932 748 134,354 133,191 2032-2036..... 142,419 93,881 2,108 272 144,527 94,153 2037-2041..... 127,701 34,719 23 1 127,724 34,720 2042-2044..... 44,255 2,862 - - 44,255 2,862 Total...... $ 839,594 $ 662,931 $ 6,857 $ 3,587 $ 846,451 $ 666,518

* Includes payment of accreted interest

Due to/Advances from the Primary Government – In January 2003, the City and the former Agency entered into a Cooperation and Tax Increment Reimbursement Agreement. The City agreed to advance property tax revenues to the former Agency for the debt service payments on the Tax Allocation Revenue Bonds, San Francisco Redevelopment Projects Series 2003 B and C. The former Agency agreed to make reimbursement payments related to the Jessie Square Parking Garage and fully repay the advances by fiscal year 2018. In accordance with HSC Section 34191.4(b)(3), interest shall be accrued quarterly at an annual rate of 3% on the principal balance due to the City. The City and the Successor Agency have accrued interest at the Local Agency Investment Fund (LAIF) rate, which was less than the statutory rate as of June 30, 2015. During the year ended June 30, 2016, the Successor Agency retroactively applied the 3% interest rate and increased the balance by $2.2 million. Also during the same fiscal year, the City advanced $0.7 million in property tax revenues to the Successor Agency for debt service payments. Interest in the amount of $0.6 million was accrued based on the balance due to the City, and the Successor Agency has made payments in the amount of $26.8 million to the City to fully repay the advances.

During the year ended June 30, 2010, the former Agency borrowed $16.5 million from the Low and Moderate Income Housing Fund (LMIHF) to make payment of $28.7 million to the Supplemental Education Revenue Augmentation Funds (SERAF) to meet the State’s Proposition 98 obligations to schools. Upon dissolution of the former Agency, the City elected to become the Housing Successor Agency and retained the former Agency’s housing assets and functions, rights, powers, duties, and obligations. In accordance with HSC Section 34191.4(b)(3), interest is accrued quarterly at an annual rate of 3% on the principal balance due to the City. For the year ended June 30, 2016, interest in the amount of $0.4 million was accrued, and the Successor Agency made payments in the amount of $1.8 million to the City. The outstanding payable balance at June 30, 2016, was $14.6 million, which was comprised of principal of $11.8 million and accrued interest of $2.8 million.

As of June 30, 2016, the Successor Agency also has a payable to the City in the amount of $2,611 which consists of $554 for Jessie Square cost reimbursements and $2,057 for other services provided.

145 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

(c) Commitments and Contingencies Related to the Successor Agency Encumbrances - At June 30, 2016, the Successor Agency had outstanding encumbrances totaling approximately $63.0 million.

Risk Management - The Successor Agency obtained coverage for personal injury, automobile liability, public official errors and omissions and employment practices liability with limits of $10.0 million per occurrence ($5.0 million for employment practices liability) and a $0.03 million deductible per occurrence.

Operating Lease - The Successor Agency has noncancelable operating leases for its office sites and a Master Lease Option Agreement with the San Francisco Port Commission; these are enforceable obligations of the Successor Agency. As of June 30, 2016, the Successor Agency has exercised several of the lease options. The leases require the following minimum annual payments:

Fisca l Fi sca l Years Years 2017………..……… $ 1,341 2022-2026……….. $ 4,351 2018………..……… 870 2027-2031……….… 4,351 2019………..……… 870 2032-2036……….. 4,351 2020………..……… 870 2037-2041……….. 4,351 2021………..……… 870 2042-2046……….. 4,351 2047-2051………… 2,828

Total…………….… $ 29,404

Rent payments totaling $1.4 million are included in the Successor Agency’s financial statements for the year ended June 30, 2016.

Regarding rental income, the Successor Agency has noncancelable operating leases on various facilities within project areas. The minimum future rental income are as follows:

Fiscal Years Fiscal Years 2017………..……… $ 4,506 2027-2031……….… $ 21,757 2018………..……… 4,486 2032-2036……….. 22,830 2019………..……… 4,362 2037-2041……….. 20,037 2020………..……… 4,248 2042-2046……….. 19,834 2021………..……… 4,269 2047-2050………… 2,819 2022-2026……….… 22,000

Total……………… $ 131,148

For the year ended June 30, 2016, operating lease rental income for noncancelable operating leases was $11.3 million, of which $7.1 million represents contingent rental income received. At June 30, 2016, the leased assets had a net book value of $35.3 million.

146 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Notes and Mortgages Receivable – During the process of selling land to developers and issuing mortgage revenue bonds, the Successor Agency may defer receipt of land sale proceeds and mortgage revenue bond financing fees from various private developers in exchange for notes receivable, which aids the developers’ financing arrangements. The Successor Agency recognizes all revenues and interest on the above-described arrangements when earned, net of any amounts deemed to be uncollectible. During the year ended June 30, 2016, the Successor Agency disbursed $47.7 million to the developers through this arrangement and recorded an allowance against these receivables. This allowance is recorded as deductions in the financial statements. At June 30, 2016, the gross value of the notes and mortgage receivable was $110.7 million and the allowance for uncollectible amounts was $109.0 million.

Conduit Debt - Various community facility district bonds and mortgage revenue bonds have been issued by the former Agency on behalf of various developers and property owners who retain full responsibility for the repayment of the debt. When these obligations are issued, they are secured by the related mortgage indebtedness and special assessment taxes, and, in the opinion of management, are not considered obligations of the Successor Agency or the City and are therefore not included in the financial statements. Debt service payments will be made by developers or property owners. All of the mortgage revenue bonds issued by the former Agency were transferred to the City upon the dissolution of the former Agency. At June 30, 2016, the Successor Agency had outstanding community facility district bonds totaling $191.4 million.

Transbay Transit Center Agreements - In July 2003, the City, the Transbay Joint Powers Authority (TJPA), and the State of California acting through its Department of Transportation (Caltrans) entered into the Transbay Transit Terminal Cooperative Agreement (Cooperative Agreement) in which Caltrans agreed to transfer approximately 10 acres of State-owned property in and around the then-existing Transbay Terminal to the City and the TJPA to help fund the development of the Transbay Transit Center (TTC). The Cooperative Agreement requires that the TJPA sell certain State-owned parcels and use the revenues from the sales and the net tax increments to finance the TTC.

In 2008, the City and the former Agency entered into a binding agreement with the TJPA that irrevocably pledges all sales proceeds and net tax increments from the State-owned parcels to the TJPA for a period of 45 years (Pledge Agreement). At the same time, the City, the TJPA and the former Agency entered into an Option Agreement which grants options to the former Agency to acquire the State- owned parcels, arrange for development of the parcels, and distribute the net tax increments to the TJPA to use for the TTC. During the year ended June 30, 2016, the Successor Agency received $1.6 million from a developer and distributed the funds to the TJPA. The payment was recorded as a neighborhood development deduction on the statement of changes in fiduciary net position.

(15) TREASURE ISLAND DEVELOPMENT AUTHORITY

The Treasure Island Development Authority (TIDA) is a nonprofit public benefit corporation. TIDA was authorized in accordance with the Treasure Island Conversion Act of 1997. TIDA is governed by seven members of the TIDA Board of Directors who are appointed by the Mayor, subject to confirmation by the City’s Board of Supervisors. The specific purpose of TIDA is to promote the planning, redevelopment, reconstruction, rehabilitation, reuse and conversion of the property known as Naval Station Treasure Island for the public interest, convenience, welfare and common benefit of the inhabitants of the City.

147 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

The services provided by TIDA include negotiating the acquisition of former Naval Station Treasure Island with the U.S. Navy and establishing the Treasure Island Development Project; renting Treasure Island facilities leased from the U.S. Navy to generate revenues sufficient to cover operating costs; maintaining Treasure Island facilities owned by the U.S. Navy which are not leased to TIDA or the City; providing facilities for special events, film production and other commercial business uses; leasing approximately 700 existing housing units; and overseeing the U.S. Navy’s toxic remediation activities on the former naval base.

In early 2000, TIDA initiated a master developer selection process, culminating in the selection of Treasure Island Community Development, LLC (TICD) in March 2003. TIDA and TICD entered into an Exclusive Negotiating Agreement in 2003, and began work on the Development Plan and Term Sheet for the Redevelopment of Naval Station Treasure Island (Development Plan). The Development Plan represented the culmination of nearly seven years of extensive public discourse about the future of Treasure Island, and was the product of the most extensive public review process for a large development project in the City’s history. The Development Plan was endorsed by the TIDA Board and the San Francisco Board of Supervisors in December 2006. In May 2010, the TIDA Board and Board of Supervisors both unanimously endorsed a package of legislation that included an Update to the Development Plan and Term Sheet, terms of an Economic Development Conveyance Memorandum of Agreement (EDC MOA Term Sheet), and a Term Sheet between TIDA and the Treasure Island Homeless Development Initiative (TIHDI). The 2006 endorsement and 2010 update of the Development Plan marked two very important milestones for the project, as they very specifically guided the enormous efforts undertaken since then to make the ambitious development plans for Treasure Island a reality. Together the updated Development Plan, the EDC MOA Term Sheet and the TIHDI Term Sheet formed the comprehensive vision for the future of the former military base and represented a substantial step towards implementation of the project.

In April 2011, the TIDA Board and the Planning Commission certified the environmental impact report for the project and approved various project entitlements, including amendments to the Planning Code, Zoning Maps and General Plan, as well as a Development Agreement, Disposition and Development Agreement and Interagency Cooperation Agreement. These entitlements include detailed plans for land uses, phasing, infrastructure, transportation, sustainability, housing – including affordable housing, jobs and equal opportunity programs, community facilities and project financing. Collectively, the entitlements provide a holistic picture of the future development. In June 2011, the Board of Supervisors unanimously upheld the certification of the project’s environmental impact report and approved the project entitlements. These project approvals established the framework and cleared the way for realization of a new environmentally sustainable community on Treasure Island and the thousands of construction and permanent jobs the construction will bring.

On May 29, 2015, the Navy made the first transfer of property to TIDA consisting of 290 acres on Yerba Buena and Treasure Islands and the offshore submerged lands. Existing structures on Yerba Buena were demolished between February and August 2016, and demolition of structures in the first area of development on Treasure Island began in July 2016. The first infrastructure construction projects – new water reservoirs and new roadways, utilities, and related facilities on Yerba Buena Island – have been awarded and will mobilize in November 2016, with vertical construction beginning in 2017, and the first new homes ready for occupancy in 2019. The complete build-out of the project is anticipated to occur over fifteen to twenty years.

148 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

In July 2008, and amended several times over the intervening years, the Transportation Authority entered into a loan agreement with TIDA in the amount of $11.0 million for the repayment of costs related to the Yerba Buena Island (YBI) Interchange Improvement Project. Under the terms of the agreement, TIDA will repay the Transportation Authority for all project costs incurred by the Transportation Authority and accrued interest, less federal government reimbursements to the Transportation Authority. If the federal grant funds do not become available for some or all of the project costs, or if the federal agency disallows the Transportation Authority’s reimbursement claims on some or all of the project costs, then TIDA bears the responsibility to repay the Transportation Authority for all costs incurred on the YBI Interchange Improvement Project for a total loan obligation amount not- to-exceed $18.8 million. Interest shall accrue on all outstanding unpaid project costs until TIDA and federal agencies fully reimburse the Transportation Authority for all costs related to the project. Interest will be compounded quarterly, at the City Treasurer’s Pooled Investment Fund rate or the Transportation Authority’s borrowing rate, whichever is applicable, beginning on the date of the Transportation Authority’s reimbursement claim to Caltrans until the Transportation Authority costs and all accrued interest has been repaid. The repayment to the Transportation Authority was structured to be paid by TIDA in three installments with the first installment equal to 50% of the current balance being due 30 days after the first close of escrow for transfer of the Naval Station Treasure Island to TIDA from the Navy. The second installment is due on the anniversary of the first installment in an amount of 50% of the then current balance, and a final payment of the remaining balance of the loan is due thereafter. This loan is collateralized by the senior security interest in TIDA’s right, title and interest in and to 1) the rents accruing under the Sublease, Development, Marketing and Property Management Agreement between TIDA and The John Stewart Company, related to the subleasing of existing residential units at the Naval Station Treasure Island; and 2) any and all other TIDA revenue, except revenue prohibited by applicable laws from being used for this purpose or is necessary for repayment of the annual amount of TIDA’s pre-existing Hetch Hetchy utility obligation under the Memorandum of Understanding (MOU) between TIDA and Hetch Hetchy. Under the Disposition and Development Agreement between TIDA and Treasure Island Community Development, LLC (TICD), the master developer for Treasure Island and Yerba Buena Island, TICD is committed to fulfill TIDA’s obligations under the loan agreement between TIDA and the Transportation Authority. On June 26, 2015, TICD made a payment directly to the Transportation Authority on TIDA’s behalf in the amount of $5.4 million. On June 28, 2016, TICD made a payment to TIDA in the amount of $2.8 million which TIDA, in turn, paid to the Transportation Authority on June 30, 2016.

As of June 30, 2016, TIDA has the following payables to other City departments:

6/30/2016 Payable to Purpose Current Noncurrent Total SFCTA YBI Loan Agreement$ - $ 2,894 $ 2,894 SFCTA YBI and mobility management expenses 220 - 220 Hetch Hetchy Utility operations under MOU 200 228 428 Hetch Hetchy Energy efficiency project - 2,599 2,599 $ 420 $ 5,721 $ 6,141

149 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

(16) INTERFUND RECEIVABLES, PAYABLES, AND TRANSFERS

“Due to” and “due from” balances have primarily been recorded when funds overdraw their share of pooled cash or when there are transactions between entities where one or both entities do not participate in the City’s pooled cash or when there are short-term loans between funds. The composition of interfund balances as of June 30, 2016 is as follows:

Receivable Fund Payable Fund Amount General Fund Nonmajor Governmental Funds$ 4,366 San Francisco Water Enterprise 230 4,596

Nonmajor Governmental Funds General Fund 1,380 Nonmajor Governmental Funds 3,213 Internal Service Funds 361 Municipal Transportation Agency 2,503 San Francisco Wastewater Enterprise 2 San Francisco Water Enterprise 7 7,466

General Hospital Medical Center General Fund 55 Nonmajor Governmental Funds 2 57

San Francisco Water Enterprise General Fund 141 Nonmajor Governmental Funds 304 445

Hetch Hetchy Water and Power Enterprise General Fund 14 Nonmajor Governmental Funds 7,220 Port of San Francisco 65 General Hospital Medical Center 513 San Francisco Wastewater Enterprise 1,269 San Francisco Water Enterprise 549 9,630

Municipal Transportation Agency Nonmajor Governmental Funds 16,973

San Francisco Wastewater Enterprise General Fund 9 Nonmajor Governmental Funds 19 28

Total $ 39,195

In addition to routine short-term loans, Hetch Hetchy serves as the City’s agency for energy efficiency projects and maintains the Sustainable Energy Account (SEA) to sponsor and financially support such projects at various City departments. In this role, Hetch Hetchy may secure low-interest financing to supplement funds available in the SEA fund. At June 30, 2016, Hetch Hetchy loaned $8.4 million to other City funds. Hetch Hetchy is also due $1.2 million from the Wastewater Enterprise for its share of costs relating to 525 Golden Gate Headquarters project for equipment.

150 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

The SFMTA has a receivable from nonmajor governmental funds of $17.0 million for capital and operating grants.

Due from component units: Receivable Entity Payable Entity Amount Hetch Hetchy Water and Power Enterprise Component unit – TIDA $ 200 (1) Nonmajor Governmental Funds Component unit – TIDA 220 (1) General Fund Successor Agency 920 (2) Nonmajor Governmental Funds Successor Agency 1,297 (2) Municipal Transportation Agency Successor Agency 31 (2) San Francisco Water Enterprise Successor Agency 94 (2) Hetch Hetchy Water and Power Enterprise Successor Agency 218 (2) San Francisco Wastewater Enterprise Successor Agency 51 (2)

Advance to component units: Receivable Entity Payable Entity Amount Hetch Hetchy Water and Power Enterprise Component unit – TIDA $ 2,827 (1) Nonmajor Governmental Funds Component unit – TIDA 2,894 (1) Nonmajor Governmental Funds Successor Agency 14,602 (2)

(1) See discussion at Note 15. (2) See discussion at Note 14(b) related to the Due to/Advances from the Primary Government.

Transfers In: Funds (in thousands) San Hetch Francisco Nonmajor Hetchy General Govern- Internal Water and Municipal Hospital Laguna Transfers Out: General mental Service Water Power Transporta- Medical Wastewater Port of San Honda Funds Fund Funds Funds Enterprise Enterprise tion Agency Center Enterprise Francisco Hospital Total

General Fund...... $ -$ 289,079 $ 5 $ 200 $ 110 $ 381,342 $ 240,120 $ 80 $ 80 $ 51,327 $ 962,343 Nonmajor governmental funds...... 8,636 78,799 - 34,168 1,275 142,147 - 380 24,052 - 289,457 Internal Service Funds...... 115 ------115 San Francisco - International Airport...... 42,542 ------42,542 Water Enterprise...... 214 910 ------1,124 Hetch Hetchy Water and Power Enterprise...... 673 32 ------705 Municipal Transportation Agency...... 2,335 2,359 ------4,694 San Francisco General Hospital Medical Center...... 131,411 ------28 131,439 Wastewater Enterprise...... 16,453 32 ------16,485 Port of San Francisco...... - 32 ------32 Laguna Honda Hospital...... 7,115 ------7,115 Total transfers out $ 209,494 $ 371,243 $ 5 $ 34,368 $ 1,385 $ 523,489 $ 240,120 $ 460 $ 24,132 $ 51,355 $ 1,456,051

The $962.3 million General Fund transfer out includes a total of $672.7 million in operating subsidies to SFMTA, SFGH, and Laguna Honda Hospital (note 13). The transfer of $289.1 million from the General Fund to the nonmajor governmental funds is to provide support to various City programs such as the Public Library and Children and Families Fund, as well as to provide resources for the payment of debt service. The transfers between the nonmajor governmental funds are to provide support for various City programs and to provide resources for the payment of debt service.

151 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

San Francisco International Airport transferred $42.5 million to the General Fund, representing a portion of concession revenues (note 13(a)). The General Fund received transfers in of $110.2 million from SFGH for the Safety Net Care Pool (SNCP) and Delivery System Reform Incentive Program (DSRIP) intergovernmental transfers (IGT), $1.9 million for interest earned by the SFGH but credited to General Fund (note 13(g)), $1.9 million for COLA adjustment allocation to various Department of Public Health (DPH) division. SFGH transferred to General Fund $0.2 million for equipment lease payments, $0.2 million for primary care center projects and offset by $1.0 million transfer from General Fund for Healthy San Francisco. The General Fund also received $18 million from SFGH and $7 million from Laguna Honda Hospital to fund the DPH project and $0.1 million for interest earned by the Laguna Honda Hospital funds but credited to General Fund.

SFMTA received $142.1 million transfers from nonmajor governmental funds, of which $61.9 million was for capital activities, $18.3 million was for operating activities, and $61.9 million to fund various street improvement projects. In turn, the SFMTA transferred $2.4 million to nonmajor governmental funds to pay for various street improvement projects. On the other hand, the SFMTA transferred $2.3 million to the General Fund for reimbursement on the 4th Street Bridge project.

The Water Enterprise received $34.4 million from transfers in, of which included $34.2 million in general obligation bond proceeds for the Auxiliary Water Supply System Earthquake Safety and Emergency Response project and $0.2 million from General Fund for the San Francisco War Memorial Veterans Building project.

The Wastewater Enterprise transferred $16.5 million to the General Fund in order to secure jurisdiction of the City owned property adjacent to the Southeast Water Pollution Control Plant (“Southeast Plant”). On the other hand, the Wastewater Enterprise received $0.4 million from the Department of Public Works for the Ocean Beach project and community projects.

The Port of San Francisco received $24.1 million transfer in, of which include a transfer fee of $1.7 million for a jurisdiction transfer to the San Francisco Real Estate Division of property to facilitate open space improvements in connection with as adjacent residential development project, $0.7 million for Port’s capital project, $13.2 million and $8.5 million of proceeds from the 2012 and 2008 San Francisco Clean and Safe Neighborhood Parks Bond, respectively, for waterfront projects.

The $1.4 million Hetch Hetchy transfers represents $1.3 million from nonmajor funds for the Lighting and Traffic Safety project, and $0.1 million from the General Fund for energy efficiency project. In turn, Hetch Hetchy transferred $0.7 million to the General Fund for Lighting Energy Efficiency projects, Heating, Ventilating and Air Conditioning (HVAC) projects.

152 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

(17) COMMITMENTS AND CONTINGENT LIABILITIES

Operating Leases The City has noncancelable operating leases for certain buildings and data processing equipment, which require the following minimum annual payments (in thousands):

Primary Government Governmental Activities

Fiscal Years 2017……………… $ 41,033 2018……………… 37,032 2019……………… 29,528 2020……………… 26,016 2021……………… 19,137 2022-2026………… 43,856 2027-2031………… 974 2032-2034………… 260 Total……………. $ 197,836

Operating leases expense incurred for fiscal year 2015-16 was approximately $36.9 million.

Business-type Activities

San Francisco Port Municipal Total Fiscal International of San Transportation Business-type Years Airport Francisco Agency (MTA) Activities 2017………… $ 162 $ 2,712 $ 12,419 $ 15,293 2018………… 73 2,712 12,661 15,446 2019………… - 2,712 12,816 15,528 2020………… - 2,712 12,611 15,323 2021………… - 2,712 13,099 15,811 2022-2026…… - 13,558 62,679 76,237 2027-2031…… - 13,558 70,306 83,864 2032-2036…… - 13,558 68,899 82,457 2037-2041…… - 13,558 74,473 88,031 2042-2046…… - 13,558 91,136 104,694 2047-2051…… - 13,558 - 13,558 2052-2056…… - 13,558 - 13,558 2057-2061……… - 13,558 - 13,558 2062-2065……… - 8,360 - 8,360 Total…………… $ 235 $ 130,384 $ 431,099 $ 561,718

Operating lease expense incurred for the Airport, Port, and SFMTA for fiscal year 2015-16 was $0.2 million, $2.8 million, and $17.1 million, respectively.

153 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Several City departments lease land and various facilities to tenants and concessionaires who will provide the following minimum annual payments:

Primary Government

Governmental Activities

Fiscal Years 2017……………… $ 2,641 2018……………… 1,927 2019……………… 856 2020……………… 750 2021……………… 603 2022-2026……… 824 2027-2031……… 450

Total……………… $ 8,051

Business-type Activities

San Francisco Port San Francisco Municipal Total Fiscal International of San General Transportation Business-type Years Airport Francisco Hospital Agency Activities 2017……………… $ 104,343 $ 41,305 $ 1,526 $ 4,539 $ 151,713 2018……………… 88,223 32,949 1,572 4,489 127,233 2019……………… 50,050 29,467 1,619 4,085 85,221 2020……………… 23,159 26,237 1,668 3,103 54,167 2021……………… 16,757 24,761 1,718 2,450 45,686 2022-2026………… 34,731 100,434 9,395 7,488 152,048 2027-2031………… - 84,110 - 6,267 90,377 2032-2036………… - 77,111 - 6,250 83,361 2037-2041………… - 49,518 - 6,250 55,768 2042-2046………… - 39,431 - 6,250 45,681 2047-2051………… - 31,582 - 6,250 37,832 2052-2056………… - 19,017 - 5,833 24,850 2057-2061………… - 17,231 - - 17,231 2062-2066………… - 17,231 - - 17,231 2067-2071………… - 11,302 - - 11,302 2072-2076………… - 10,208 - - 10,208 2077-2081………… - 699 - - 699 Total……………… $ 317,263 $ 612,593 $ 17,498 $ 63,254 $ 1,010,608

The Airport and Port have certain rental agreements with concessionaires, which specify that rental payments are to be based on a percentage of tenant sales, subject to a minimum amount. Concession percentage rents in excess of minimum guarantees for the Airport and Port were approximately $26.3 million and $18.7 million, respectively, in fiscal year 2015-16. The Airport also exercised a five-year car rental lease agreement option effective January 1, 2014. Under this agreement the rental car companies will pay 10% of gross revenues or a minimum guaranteed rent whichever is higher; also in

154 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

accordance with the terms of their concession agreement, the minimum annual guarantee (MAG) for the rental car operators does not apply if the actual enplanements achieved during a one-month period is less than 80% of the actual enplanements of the same reference month in the reference year, and such shortfall continues for three consecutive months. The MAG attributable to the rental car companies was approximately $43.3 million for fiscal year 2015-16.

Other Commitments

The Retirement System has commitments to contribute capital for real assets and private equity investments in the aggregate amount of approximately $4.7 billion at June 30, 2016.

In February 2011, the Asian Art Museum Foundation (Foundation) entered into an agreement with JP Morgan Chase Bank to refinance its obligations of $97.0 million. To facilitate the refinancing, the City entered into an assurance agreement which, in the event of nonpayment by the Foundation, requires the City to seek an appropriation to make debt payments as they become due. Since the City has not legally guaranteed the debt, and the City believes that the likelihood of nonpayment by the Foundation is remote, no amount is recorded in the City's financial statements related to this agreement.

In April 2001, the City, the Alameda-Contra Costa Transit District and the Peninsula Corridor Joint Powers Board executed a Joint Powers Agreement which created and established the Transbay Joint Powers Authority (TJPA). The TJPA has primary jurisdiction with respect to all matters concerning the financing, design, development, construction, and operation of the new Transbay Transit Center, which will replace the former Transbay Terminal in downtown San Francisco with a modern transit hub. In May 2016, the City’s Board of Supervisors adopted Resolution 166-16 approving and authorizing the execution and delivery of Tax Exempt and/or Taxable Lease Revenue Commercial Paper Certificates of Participation and Tax Exempt and/or Taxable Direct Placement Revolving Certificates of Participation in a combined aggregate principal of amount not to exceed $260 million to provide interim financing for the Transbay Transit Center construction project. As of June 30, 2016, the City has not issued the Certificates of Participation related to this resolution.

(18) RISK MANAGEMENT

Risk Retention Program Description

The City is exposed to various risks of losses related to torts, theft of, damage to, and destruction of assets; business interruption; errors and omissions; automobile liability and accident claims (primarily for SFMTA); medical malpractice; natural disasters; employee health benefit claim payments for direct provider care (collectively referred to herein as estimated claims payable); and injuries to employees (workers’ compensation). With certain exceptions, it is the policy of the City not to purchase commercial insurance for the risks of losses to which it is exposed. Instead, the City believes it is more economical to manage its risks internally and set aside funds as needed for estimated current claim settlements and unfavorable judgments through annual appropriations and supplemental appropriations.

The Airport carries general liability insurance coverage of $1.0 billion with $250.0 million in War Perils Liability, subject to a deductible of $10 per single occurrence and commercial property insurance coverage for full replacement value on all facilities at the Airport owned by the Airport, subject to a deductible of $500 per single occurrence. The Airport carries public officials liability and employment practices liability coverage of $5.0 million, subject to a deductible of $100 per single occurrence for each wrongful act other than employment practices’ violations, and $250 per each occurrence for each employment practices’ violation. The Airport also carries insurance for public employee dishonesty, fine arts, electronic data processing equipment, and watercraft liability for Airport fire and rescue vessels and target range liability for the San Francisco Police Department’s firearms range located at the Airport. The Airport has no liability insurance coverage for losses due to land movement or seismic activity, war, terrorism and hijacking.

155 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

The Port carries the following insurance: 1) marine general liability coverage of $100.0 million, subject to a deductible of $100 per occurrence; 2) hull and machinery liability coverage of $1.1 million, subject to a deductible of $100 per occurrence; 3) commercial property insurance for losses up to the insured appraised value of Port facilities, subject to a maximum of $1.0 billion and a deductible of $750 per occurrence; and 4) public officials and employee liability coverage of $5.0 million, subject to a deductible of $75 per occurrence and changes in insurance coverage to reflect current insurer appraisal values and best available policy. The Port also carries insurance coverage for employee dishonesty, auto liability, property damage for certain high value Port vehicles, water pollution, and data processing equipment. Tenants whose operations pose a significant environment risk are also required to post an environmental oversight deposit and an environmental performance deposit.

The SFMTA risk treatment program encompasses both self-insured and insured methods. Insurance purchase is generally coordinated through the City’s Risk Management Division, and in some specific cases, directly by the agency. Self-insurance is when the City manages risks internally and administers, adjusts, settles, defends, and pays claims from budgeted resources, i.e., pay-as-you-go. SFMTA’s general policy is to first evaluate self-insurance for the risks of loss to which it is exposed. When economically more viable or when required by debt financing covenants, SFMTA purchases insurance as necessary or required.

Risks Coverage a. General/Transit Liability Self-insure b. Property Self-insure and purchase insurance c. Workers’ Compensation Self-insure d. Employee (transit operators) Purchase insurance e. Directors and Officers Purchase insurance

The SFMTA is self-insured on general liability. Through coordination with the Controller and City Attorney’s Office, the SFMTA general liability payments are addressed through pay-as-you-go funding as part of the budgetary process as well as a reserve that is increased each year by approximately $3.0 million. As of June 30, 2016, the reserve was $20.1 million. Claim liabilities are actuarially determined anticipated claims and projected timing of disbursement, considering recent claim settlement trends, inflation, and other economic social factors.

The SFMTA purchases property insurance on scheduled facilities, Breda light rail cars, and personal property. Also, insurance is purchased for scheduled City parking garages covering blanket property and business interruptions. Damages to facilities and property outside of the specified schedules are self-insured. SFMTA has purchased group life insurance and a Group Felonious Assault Coverage Insurance on transit operators per a Memorandum of Understanding with the Transport Workers’ Union and has purchased insurance to cover errors and omissions of its board members and senior management.

Settled claims have not exceeded commercial insurance coverage in any of the past three fiscal years. Expenditures and liabilities for all workers’ compensation claims and other estimated claims payable are reported when it is probable that a loss has occurred and the amount of that loss can be reasonably estimated. These losses include an estimate of claims that have been incurred but not reported. Because actual claim liabilities depend on such complex factors as inflation, changes in legal doctrines, and damage awards, the process used in computing claim liabilities does not necessarily result in an exact amount. Claim liabilities are re-evaluated periodically to take into consideration recently settled claims, the frequency of claims, and other legal and economic factors. The recorded liabilities have not been discounted.

156 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Estimated Claims Payable

Numerous lawsuits are pending or threatened against the City. The City’s liability as of June 30, 2016 has been actuarially determined and includes an estimate of incurred but not reported losses and allocated loss adjustment expenses.

Changes in the reported estimated claims payable since July 1, 2014, resulted from the following activity: Current Year Beginning Claims and Ending Fiscal Year Changes in Claim Fiscal Year Fiscal Year Liability Estimates Payments Liability 2014-2015$ 247,059 $ 87,834 $ (70,063) $ 264,830 2015-2016 264,830 68,815 (56,079) 277,566

Breakdown of the estimated claims payable at June 30, 2016 is follows:

Governmental activities: Current portion of estimated claims payables…………………… $ 53,627 Long-term portion of estimated claims payable………………… 106,871

Total ………………………………………………………….………$ 160,498

Business-type activities: Current portion of estimated claims payables…………………… $ 52,808 Long-term portion of estimated claims payable………………… 64,260 Total …………………………………………………………………$ 117,068

Workers’ Compensation The City self-insures for workers’ compensation coverage. The City’s liability as of June 30, 2016 has been actuarially determined and includes an estimate of incurred but not reported losses. The total amount estimated to be payable for claims incurred as of June 30, 2016 was $417.4 million which is reported in the appropriate individual funds in accordance with the City’s accounting policies.

Changes in the reported accrued workers’ compensation since July 1, 2014, resulted from the following activity:

Current Year Beginning Claims and Ending Fiscal Year Changes in Claim Fiscal Year Fiscal Year Liability Estimates Payments Liability 2014-2015$ 383,876 $ 94,397 $ (82,699) $ 395,574 2015-2016 395,574 108,760 (86,906) 417,428

157 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Breakdown of the accrued workers' compensation liability at June 30, 2016 is as follows:

Governmental activities: Current portion of accrued workers' compensation liability…… $ 39,357 Long-term portion of accrued workers' compensation liability… 188,468

Total ………………………………………………………….………$ 227,825 Business-type activities: Current portion of accrued workers' compensation liability…… $ 31,867 Long-term portion of accrued workers' compensation liability… 157,736

Total ………………………………………………………….…… $ 189,603

(19) SUBSEQUENT EVENTS

(a) Long-term Debt Issuance In July 2016, the City issued a total of $91.4 million tax-exempt and $13.0 million taxable commercial paper (CP) with interest rates ranging from 0.44% to 0.45% and 0.58%, respectively and maturity of September 2016. The CP was issued to refund $99.8 million of maturing CP and obtain $4.5 million new funding for the Moscone Expansion and affordable housing (HOPE SF) projects. The refinanced CP was issued to provide interim funding for Moscone expansion project, the purchase of capital equipment for the San Francisco General Hospital and Trauma Center, and the rebuilding of distressed public housing sites to increase affordable housing (HOPE SF).

In August 2016, the City refinanced maturing notes by issuing a total of $31.6 million tax exempt CP with interest rate ranging from 0.43% to 0.47% to mature September and October 2016. The CP was issued to provide interim funding for Moscone expansion project and capital equipment for the San Francisco General Hospital and Trauma Center.

In September 2016, the City issued $10.0 million tax-exempt CP for the Moscone Expansion project and rolled over a total of $13.0 million taxable and $106.1 million tax-exempt maturing CP. The taxable CP bears interest rate of 0.72% and the tax-exempt CP bears interest rates ranging from 0.69% to 0.82%. The CP matures October and November 2016.

In September 2016, the Airport issued its Second Series Revenue Bonds, Series 2016B (AMT) and Series 2016C (Non-AMT), in the aggregate principal amount of $740.1 million to finance and refinance (through the repayment of subordinate commercial paper notes) a portion of the capital plan. It also issued its Second Series Revenue Refunding Bonds, Series 2016D (Non-AMT/Governmental Purpose) in the amount of $147.8 million to refund a portion of the Series 2010C, 2011D, and 2011G bonds. The Series 2016BCD bonds are uninsured, long-term, fixed rate bonds. The Series 2016B bonds mature between May 2038 and May 2046 with a coupon of 5%. The Series 2016C Bonds mature in May 2046 with a coupon of 5%. The Series 2016D Bonds mature between 2017 and 2031 with a coupon of 5%. The net proceeds of the Series 2016BC bonds ($779.2 million) were used to repay the entire outstanding balance of subordinate commercial paper notes ($343.0 million), and make a deposit into the Airport’s construction accounts to fund capital projects at the Airport. As of October 7, 2016, the Airport had no subordinate commercial paper notes outstanding.

In October 2016, the San Francisco Public Utilities Commission issued $893.8 million of San Francisco Water Revenue Bonds, Series 2016 A and B. The Series 2016 A and B Bonds refunded all or a portion of the following outstanding series of Water Revenue Bonds – 2006 B, 2006 C, 2009 A, 2009 B, 2010 A and 2010 F Bonds. The issuance resulted in approximately $107.0 million of net present value debt service savings for the Water Enterprise Fund.

158 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

In October 2016, the City issued $115.4 million tax-exempt CP to refinance $113.7 maturing notes for the Moscone Expansion Project, San Francisco General Hospital capital equipment purchase and HOPE SF, and $1.5 million in new funding for the Moscone Expansion project. The CP bears interest rate ranging from 0.80% to 0.95% will mature in December 2016 and January 2017.

In November 2016, the City issued General Obligation Bonds Series 2016F (Affordable Housing) in the amount of $75.1 million to finance the construction, development, acquisition, and preservation of housing affordable to low- and middle-income households through programs that will prioritize vulnerable populations such as San Francisco’s working families, veterans, seniors, disabled persons; to assist in the acquisition, rehabilitation, and preservation of affordable rental apartment buildings to prevent the eviction of long-term residents; to repair and reconstruct dilapidated public housing; to fund a middle income rental program; and to provide for homeownership down payment assistance opportunities for educators and middle-income households; to pay certain costs related to the issuance of Series 2016F. The bonds mature from June 2017 through June 2036 with interest rates ranging from 2.0% to 3.1%. Debt service payments for the Series 2016F are funded through ad valorem taxes on property.

In November 2016, the City issued $50.4 million tax-exempt CP to refinance $32.7 million maturing CP and $17.4 million in new funding for the Moscone Expansion and HOPE SF projects. The CP bears interest rate of 0.60% and 0.65% and will mature in January 2017.

(b) Elections

On November 8, 2016 the San Francisco voters approved the following propositions that will have a fiscal impact on the City:

Proposition C – An ordinance that authorizes the City to use the remaining $261.0 million in unissued general obligation bonds approved under the 1992 ordinance to acquire, improve and rehabilitate at- risk multi-unit residential buildings in need of seismic, fire, health and safety upgrades or other major rehabilitation; and convert those buildings to permanent affordable housing.

Proposition E – An ordinance that transfers the responsibility from property owners to the City for maintaining trees and sidewalks damaged by trees. The City would then be liable for injuries and property damage resulting from failure to maintain the trees and to repair sidewalks damaged by trees. The City would pay for maintaining these trees and sidewalks by setting aside $19.0 million per year from the City’s General Fund, adjusted annually based on the City’s revenue. Included in this proposition is an early termination clause that at any time before January 1, 2017, the Mayor, after consulting with the Budget Director and the Controller, and after taking into account the City’s projected revenues and expenditures in the City’s financial plans, may terminate implementation of sections of this charter amendment (Section 16.129 – Street Tree Maintenance).

Proposition I – A charter amendment that creates a Dignity Fund and set aside at least $38.0 million a year, plus scheduled increases, from the General Fund to provide guaranteed funding for programs and services to seniors and adults with disabilities. This fund will expire on June 30, 2037.

Proposition J – A charter amendment that creates a Homeless Housing and Services Fund, which will provide services to the homeless including housing and navigation centers, programs to prevent homelessness and assistance to transitioning out of homelessness by allocating $50.0 million per year for 24 years, adjusted annually; and create a Transportation Improvement Fund, which will be used to improve the City’s transportation network by allocating $101.6 million per year for 24 years, adjusted annually. Included in this proposition is an early termination clause that at any time before January 1, 2017, the Mayor, after consulting with the Budget Director and the Controller, and after taking into account the City’s projected revenues and expenditures in the City’s financial plans, may terminate sections of this charter amendment (Section 16.135 – Transportation Improvement Fund).

159 CITY AND COUNTY OF SAN FRANCISCO Notes to Basic Financial Statements (Continued) June 30, 2016 (Dollars in Thousands)

Proposition V – A City’s Business Tax and Regulation Code amendment to impose a one cent per fluid ounce tax on the initial distribution within the City of sugar sweetened beverages beginning January 1, 2018.

Proposition W – An ordinance that increases the transfer tax rate for real property with a sales price of more than $5.0 million, including leases of 35 years or more. The current tax rate will not change.

Subsequent to the fiscal year ended June 30, 2016, a GASB Statement No. 67/68 report for the San Francisco Employees’ Retirement System (SFERS) dated November 2016 was issued by Cheiron, SFERS’ actuary, resulting in a significant increase in the City’s net pension liability. Based on this new report, the City’s net pension liability is approximately $5.48 billion, which will be reported in the City’s financial statements for the fiscal year ending June 30, 2017 in accordance with GASB Statement No. 68. This increase is due to investment losses, the Appeals Court’s elimination of the full funding requirement for certain members, and the impact of the revised demographic assumptions and change in discount rate.

(d) Property Transactions

On September 19, 2016, U.S. Department of the Navy transferred to the Treasure Island Development Authority (TIDA) portions of the former Naval Station Treasure Island including Site 27 Parcel (Clipper Cove), consisting of approximately 20.27 acres and Site 21 Parcel and Building 3, consisting of approximately 6.67 acres. This is the second transfer of Navy land to TIDA. The first transfer occurred on May 29, 2015. Both transfers are part of the Economic Development Conveyance Memorandum of Agreement between the United States of America, acting by and through the Department of the Navy and TIDA for the Conveyance of the Naval Station Treasure Island dated July 2, 2014.

160 CITY AND COUNTY OF SAN FRANCISCO Required Supplementary Information (Unaudited) – Schedules of the City’s Proportionate Share of the Net Pension Liability June 30, 2016 (Dollars in Thousands)

For the year ended June 30, 2016 CalPERS Miscellaneous Plans Transportation City Authority Classic & Successor Agency SFERS Plan City PEPRA Classic & PEPRA Treasure Island

Proportion of net pension liability 93.9032% -0.2033% 0.0188% 0.2413% 0.0004% Proportionate share of the net pension liability (asset) $ 2,156,049 $ (13,956) $ 1,288 $ 16,563 $ 24 Covered payroll ** $ 2,529,879 $ 319 $ 3,684 $ 3,427 $ - Proportionate share of the net pension liability as a percentage of covered payroll 85.22% -4374.92% 34.96% 483.31% 0.00% Plan fiduciary net position as a percentage of total pension liability 89.90% 78.40% 78.40% 78.40% 78.40%

For the year ended June 30, 2015 CalPERS Miscellaneous Plans Transportation City Authority Classic & Successor Agency SFERS Plan City PEPRA Classic & PEPRA Treasure Island

Proportion of net pension liability 93.7829% -0.1829% 0.0208% 0.2550% N/A Proportionate share of the net pension liability (asset) $ 1,660,365 $ (11,381) $ 1,299 $ 15,870 $ - Covered payroll ** $ 2,398,979 $ 303 $ 3,264 $ 3,962 $ - Proportionate share of the net pension liability as a percentage of covered payroll 69.21% -3756.11% 39.80% 400.56% - Plan fiduciary net position as a percentage of total pension liability 91.84% 80.43% 80.43% 80.43% -

Notes to Schedule:

SFERS Plan

Benefit Change – There were no changes in benefits during the year.

Changes of Assumptions – The discount rate was reduced from 7.58% to 7.46%.

CalPERS Miscellaneous Plans

Benefit Changes – The figures above do not include any liability impact that may have resulted from plan changes which occurred after the June 30, 2014 valuation date. This applies for voluntary benefit changes as well as any offers of Two Years Additional Service Credit (a.k.a. Golden Handshakes).

Changes of Assumption – The discount rate was changed from 7.5 percent (net of administrative expense) in fiscal year 2015 to 7.65 percent in fiscal year 2016 to correct for an adjustment to exclude administrative expense.

* Fiscal year 2014-15 was the first year of implementation of GASB No. 68, therefore only two years of information is shown.

** Due to early implementation of GASB Statement No. 82, the City updated covered employee payroll with covered payroll.

161 CITY AND COUNTY OF SAN FRANCISCO Required Supplementary Information (Unaudited) – Schedule of Changes in Net Pension Liability and Related Ratios June 30, 2016* (Dollars in Thousands)

City CalPERS Safety Plan 2016 2015 Total pension liability: Service cost...... $ 30,987 $ 32,688 Interest on the total pension liability...... 80,057 76,177 Changes of assumptions...... (19,949) - Difference between expected and actual experience...... (14,218) - Benefit payments, including refunds of...... employee contributions...... (44,699) (41,387) Net change in total pension liability...... 32,178 67,478 Total pension liability, beginning...... 1,087,527 1,020,049 Total pension liability, ending...... $ 1,119,705 $ 1,087,527

Plan fiduciary net position: Plan to plan resource movement...... $ (4) $ - Contributions from the employer...... 20,718 20,613 Contributions from employees...... 15,061 15,216 Net investment income ...... 20,469 138,628 Benefit payments, including refunds of...... employee contributions...... (44,699) (41,387) Administrative expenses...... (1,048) - Net change in plan fiduciary net position...... 10,497 133,070 Plan fiduciary net position, beginning...... 920,371 787,301 Plan fiduciary net position, ending...... $ 930,868 $ 920,371

Plan net pension liability, ending………………………………… $ 188,837 $ 167,156

Plan fiduciary net position as a percentage of the total pension liability………………………………………………… 83.14% 84.63%

Covered payroll **…………………………………………………… $ 109,462 $ 111,311

Plan net pension liability as a percentage of the covered payroll …………………………………………………….. 172.51% 150.17%

Notes to Schedule:

Changes of Assumptions – The discount rate was changed from 7.5 percent (net of administrative expense) in fiscal year 2015 to 7.65 percent in fiscal year 2016.

* Fiscal year 2014-15 was the first year of implementation of GASB No. 68, therefore only two years of information is shown.

** Due to early implementation of GASB Statement No. 82, the City updated covered employee payroll with covered payroll.

162 CITY AND COUNTY OF SAN FRANCISCO Required Supplementary Information (Unaudited) – Schedules of Employer Contributions – Pension Plans June 30, 2016* (Dollars in Thousands)

For the year ended June 30, 2016 CalPERS Miscellaneous Plans

City Transportation Successor Treasure CalPERS SFERS Plan City Authority Agency Island Safety Plan

Actuarially determined contributions (1) $ 496,343 $ 33 $ 280 $ 828 $ 2 $ 23,629 Contributions in relation to the actuarially determined contributions (1) (496,343) (33) (280) (828) (2) (23,629) Contribution deficiency (excess)$ - $ - $ - $ - $ - $ - Covered payroll **$ 2,681,695 $ 329 $ 3,644 $ 3,769 $ - $ 95,552 Contributions as a percentage of covered payroll 18.51% 10.03% 7.68% 21.97% 0.00% 24.73%

For the year ended June 30, 2015 CalPERS Miscellaneous Plans

City Transportation Successor Treasure CalPERS SFERS Plan City Authority Agency Island Safety Plan

Actuarially determined contributions (1), *** $ 556,511 $ 31 $ 400 $ 598 $ 2 $ 20,718 Contributions in relation to the actuarially determined contributions (1) (556,511) (31) (400) (598) (2) (20,718) Contribution deficiency (excess)$ - $ - $ - $ - $ - $ - Covered payroll**$ 2,529,879 $ 319 $ 3,684 $ 3,427 $ - $ 109,462 Contributions as a percentage of covered payroll 22.00% 9.72% 10.86% 17.45% 0.00% 18.93%

(1) Contractually required contributions is an actuarial determined contribution for all cost-sharing plans. * Fiscal year 2014-15 was the first year of implementation of GASB Statement No. 68, therefore only two years of information is shown.

** Due to early implementation of GASB Statement No. 82, the City updated covered employee payroll with covered payroll.

*** In fiscal year 2014-15, the actuarially determined contributions were based on an estimate. The City made a $0.1 million adjustment to align the estimated employer contribution amount with the actual employer contribution per the 2015 agent- multiple employer CalPERS report for the CalPERS Safety Plan. Due to the early implementation of GASB Statement No. 82, the City decreased the actuarially determined contributions for the City SFERS Plan to deduct the employer pickup in the amount of $8.6 million.

163 CITY AND COUNTY OF SAN FRANCISCO Required Supplementary Information (Unaudited) – Schedules of Employer Contributions – Pension Plans (Continued) June 30, 2016* (Dollars in Thousands)

164 CITY AND COUNTY OF SAN FRANCISCO Required Supplementary Information (Unaudited) – Schedules of Funding Progress and Employer Contributions Other Postemployment Healthcare Benefits June 30, 2016 (Dollars in Thousands)

The schedules of funding progress presented below provide consolidated snapshots of the entity’s ability to meet current and future liabilities with plan assets. Of particular interest to most is the funded status ratio. This ratio conveys a plan’s level of assets to liabilities, an important indicator to determine the financial health of the OPEB plans. The closer the plan is to a 100% funded status, the better position it will be in to meet all of its future liabilities.

Schedule of Funding Progress – City and County of San Francisco – Other Postemployment Health Care Benefits Actuarial Accrued (Under) UAAL as Actuarial Actuarial Liability funded a % of Valuation Asset (AAL) AAL Funded Covered Covered Date Value Entry Age (UAAL) Ratio Payroll Payroll 07/01/10(1) $ - $ 4,420,146 $ (4,420,146) 0.0%$ 2,393,930 184.6% 07/01/12 17,852 3,997,762 (3,979,910) 0.4% 2,457,633 161.9% 07/01/14 48,988 4,260,256 (4,211,268) 1.1% 2,618,426 160.8%

(1) As of July 1, 2010, the City set-aside approximately $3.2 million in assets for the OPEB plan. However, the Retiree Health Care Trust Fund was not established until December 2010.

Schedule of Employer Contributions – City and County of San Francisco – Other Postemployment Health Care Benefits

Annual Year ended Required Percentage June 30, Contribution Contributed 2014$ 341,377 48.8% 2015 350,389 47.7% 2016 354,540 47.6%

165 CITY AND COUNTY OF SAN FRANCISCO Required Supplementary Information (Unaudited) – Schedules of Funding Progress and Employer Contributions Other Postemployment Healthcare Benefits (Continued) June 30, 2016 (Dollars in Thousands)

Schedule of Funding Progress – San Francisco County Transportation Authority – Other Postemployment Health Care Benefits

Actuarial Accrued (Under) UAAL as Actuarial Actuarial Liability funded a % of Valuation Asset (AAL) AAL Funded Covered Covered Date (1) Value Entry Age (UAAL) Ratio Payroll Payroll 06/30/11$ 405 $ 671 $ (266) 60.4%$ 3,251 8.2% 06/30/13 760 1,124 (364) 67.6% 3,253 11.2% 06/30/15 1,170 2,042 (872) 57.3% 3,930 22.2%

(1) The actuarial valuation report is conducted once every two years.

Schedule of Employer Contributions – San Francisco County Transportation Authority

Annual Required Percentage Fiscal Year Ended Contribution Actual Contribution Contributed 06/30/14$ 138,000 $ 138,000 100.0% 06/30/15 138,000 138,000 100.0% 06/30/16 200,700 206,513 102.9%

Schedule of Funding Progress – Successor Agency – Other Postemployment Health Care Benefits

Accrued (Under) UAAL as Actuarial Actuarial Liability funded a % of Valuation Asset (AAL) AAL Funded Covered Covered Date (1) Value Entry Age (UAAL) Ratio Payroll Payroll 06/30/11$ 1,856 $ 14,390 $ (12,534) 12.9%$ 4,185 299.5% 06/30/13 2,154 11,378 (9,224) 18.9% 4,048 227.9% 07/01/15 2,833 10,998 (8,165) 25.8% 4,261 191.6%

(1) The actuarial valuation report is conducted once every two years.

166

SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS

CITY AND COUNTY OF SAN FRANCISCO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED JUNE 30, 2016

Catalog of Federal Amount Domestic Assistance Pass-Through Federal Provided to Federal Grantor/Pass-Through Grantor/Program Title Number (CFDA) Identifying Number Expenditures Subrecipients U.S. DEPARTMENT OF AGRICULTURE Direct Program Supplemental Nutrition Assistance Program, Process and Technology Improvement Grants 10.580 -- $ 528,466 $ -

Passed through State of California Department of Public Health Plant and Animal Disease, Pest Control, and Animal Care 10.025 None 7,543 - Special Supplemental Nutrition Program for Women, Infants, and Children 10.557 14-10226 702,159 - Special Supplemental Nutrition Program for Women, Infants, and Children 10.557 15-10059 2,030,897 - State Administrative Matching Grants for the Supplemental Nutrition Assistance Program 10.561 13-20505 1,233,973 -

Passed through State of California Department of Education Child Nutrition Cluster School Breakfast Program 10.553 None 43,669 - National School Lunch Program 10.555 None 69,810 - Child and Adult Care Food Program 10.558 04029-CACFP-38 61,554 - Summer Food Service Program for Children 10.559 04029-SFSP-38 363,741 -

Subtotal Child Nutrition Cluster 538,774 -

Passed through State of California Department of Aging State Administrative Matching Grants for the Supplemental Nutrition Assistance Program 10.561 SP-1415-06 96,913 96,795 State Administrative Matching Grants for the Supplemental Nutrition Assistance Program 10.561 SP-1516-06 25,879 25,113

Passed through State of California Department of Food and Agriculture Senior Farmers Market Nutrition Program 10.576 None 40,000 - Passed through State of California Department of Social Services State Administrative Matching Grants for the Supplemental Nutrition Assistance Program 10.561 None 34,286,102 1,896,510

Total pass-through programs 38,962,240 2,018,418

TOTAL U.S. DEPARTMENT OF AGRICULTURE 39,490,706 2,018,418

U.S. DEPARTMENT OF COMMERCE Direct Program Cluster Grants 11.020 -- 122,635 - Economic Adjustment Assistance 11.307 -- 420,520 -

TOTAL U.S. DEPARTMENT OF COMMERCE 543,155 -

U.S. DEPARTMENT OF DEFENSE Direct Program Navy Cooperative Agreement for Hunters Point 12.unknown -- 975,143 -

Passed through University of Southern California Military Medical Research and Development 12.420 70740673 4,065 -

TOTAL U.S. DEPARTMENT OF DEFENSE 979,208 -

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT Direct Programs Community Development Block Grants/Entitlement Grants 14.218 -- 16,595,956 7,720,233 Rental Housing Rehabilitation 14.230 -- 64,476 4,533 Emergency Solutions Grant Program 14.231 -- 1,477,091 1,354,865 Shelter Plus Care 14.238 -- 625,815 - Home Investment Partnerships Program 14.239 -- 9,556,618 - Housing Opportunities for Persons with AIDS 14.241 -- 7,395,599 4,503,318 Community Development Block Grants - Section 108 Loan Guarantees 14.248 -- 40,242 - Economic Development Initiative-Special Project, Neighborhood Initiative and Miscellaneous Grants 14.251 -- 16,639 - Continuum of Care Program 14.267 -- 17,981,678 5,740,375 Lead-Based Paint Hazard Control In Privately-Owned Housing 14.900 -- 104,568 - Lead Hazard Reduction Demonstration Grant Program 14.905 -- 197,228 -

TOTAL U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 54,055,910 19,323,324

U.S. DEPARTMENT OF INTERIOR Direct Programs NPS Cooperative Agreement 15.unknown -- 891,330 - Coastal Impact Assistance 15.668 -- 95,578 -

Subtotal direct programs 986,908 -

Passed through California Office of Historic Preservation Historic Preservation Fund Grants-In-Aid 15.904 P14AF00134 23,018 -

Passed through State of California Department of Parks and Recreation Outdoor Recreation - Acquisition, Development and Planning 15.916 06-01766 54,738 -

Total pass-through programs 77,756 -

TOTAL U.S. DEPARTMENT OF INTERIOR 1,064,664 -

See accompanying notes to the Schedule of Expenditures of Federal Awards. 167 CITY AND COUNTY OF SAN FRANCISCO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS (Continued) FOR THE YEAR ENDED JUNE 30, 2016

Catalog of Federal Amount Domestic Assistance Pass-Through Federal Provided to Federal Grantor/Pass-Through Grantor/Program Title Number (CFDA) Identifying Number Expenditures Subrecipients U.S. DEPARTMENT OF JUSTICE Direct Programs Supervised Visitation, Safe Havens for Children 16.527 -- $ 133,878 $ 115,494 Grants to Encourage Arrest Policies and Enforcement of Protection Orders Program 16.590 -- 51,843 46,458 PREA Program: Demonstration Projects to Establish "Zero Tolerance" Cultures for Sexual Assault In Correctional Facilities 16.735 -- 1,479 - Edward Byrne Memorial Justice Assistance Grant Program 16.738 -- 669,754 - DNA Backlog Reduction Program 16.741 -- 514,251 - Criminal and Juvenile Justice and Mental Health Collaboration Program 16.745 -- 119,842 107,575 Congressionally Recommended Awards 16.753 -- 59,285 57,325 Second Chance Act Reentry Initiative 16.812 -- 213,837 121,767 Byrne Criminal Justice Innovation Program 16.817 -- 132,685 46,275 Smart Prosecution Initiative 16.825 -- 206,413 64,243 Equitable Sharing Program 16.922 -- 2,211,152 -

Subtotal direct programs 4,314,419 559,137

Passed through Board of State and Community Corrections Juvenile Accountability Block Grants 16.523 BSCC 170-15 78,235 - Juvenile Accountability Block Grants 16.523 BSCC 224-15 17,185 - Total Juvenile Accountability Block Grants 95,420 -

Edward Byrne Memorial Justice Assistance Grant Program 16.738 650-14 436,732 - Edward Byrne Memorial Justice Assistance Grant Program 16.738 650-15 412,208 - Total Edward Byrne Memorial Justice Assistance Grant Program 848,940 -

Passed through State of California Emergency Management Agency Crime Victim Assistance 16.575 HA14 01 0380 19,210 - Crime Victim Assistance 16.575 HA15 02 0380 59,596 - Crime Victim Assistance 16.575 UV14 05 0380 71,813 - Crime Victim Assistance 16.575 VW15 34 0380 502,638 - Crime Victim Assistance 16.575 XV15 01 0380 19,284 - Total Crime Victim Assistance 672,541 -

Violence Against Women Formula Grants 16.588 PU 14 05 0380 14,630 - Violence Against Women Formula Grants 16.588 PU 15 06 0380 89,815 - Violence Against Women Formula Grants 16.588 VV15 07 0380 189,011 - Total Violence Against Women Formula Grants 293,456 -

Paul Coverdell Forensic Sciences Improvement Grant Program 16.742 075-00000 5,476 - Paul Coverdell Forensic Sciences Improvement Grant Program 16.742 CQ14100380 9,048 - Paul Coverdell Forensic Sciences Improvement Grant Program 16.742 CQ15110380 2,442 - Total Paul Coverdell Forensic Sciences Improvement Grant Program 16,966 -

Passed through Bureau of Justice Assistance Edward Byrne Memorial Competitive Grant Program 16.751 2013-DB-BX-0047 76,256 -

Total pass-through programs 2,003,579 -

TOTAL U.S. DEPARTMENT OF JUSTICE 6,317,998 559,137

U.S. DEPARTMENT OF LABOR Direct Programs H-1B Job Training Grants 17.268 -- 27,392 20,783 Workforce Innovation Fund 17.283 -- 201,052 5,058 Total direct programs 228,444 25,841

Passed through State of California Department of Employment Development Employment Service/Wagner-Peyser Funded Activities 17.207 K597227 2,205 2,205

Workforce Investment Act (WIA) Cluster WIA Adult Program 17.258 K594791 566,466 307,309 WIA Adult Program 17.258 K698392 1,077,006 689,608 Subtotal WIA Adult Program 1,643,472 996,917

WIA Youth Activities 17.259 K594791 325,742 57,368 WIA Youth Activities 17.259 K698392 1,264,787 921,258 Subtotal WIA Youth Activities 1,590,529 978,626

WIA/WIOA Dislocated Worker Formula Grants 17.278 K594791 498,618 252,013 WIA/WIOA Dislocated Worker Formula Grants 17.278 K698392 1,712,039 964,999 Subtotal WIA Dislocated Worker Formula Grants 2,210,657 1,217,012

Subtotal WIA Cluster 5,444,658 3,192,555

Passed through NOVA Workforce Board H-1B Job Training Grants 17.268 001-RTW-15 405,768 267,047

Passed through WestEd H-1B Job Training Grants 17.268 s12-053 137,738 137,738

Subtotal H-1B Job Training Grants 543,506 404,785

Subtotal pass-through programs 5,990,369 3,599,545

TOTAL U.S. DEPARTMENT OF LABOR 6,218,813 3,625,386

See accompanying notes to the Schedule of Expenditures of Federal Awards. 168 CITY AND COUNTY OF SAN FRANCISCO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS (Continued) FOR THE YEAR ENDED JUNE 30, 2016

Passed through State of California Department of Transportation Highway Planning and Construction 20.205 1580 STPL 6084 (146) 600,000 - Highway Planning and Construction 20.205 ATPL-5934(175) 26,620 - Highway Planning and Construction 20.205 BHLO-5934(168) 1,323,380 - Highway Planning and Construction 20.205 BRLS-5934(177) 107,952 - Highway Planning and Construction 20.205 CML-5933(109) 180,082 - Highway Planning and Construction 20.205 CML-5934(169) 52,110 - Highway Planning and Construction 20.205 CML-5934(172) 453,199 - Highway Planning and Construction 20.205 CML-5934(173) 16,815 - Highway Planning and Construction 20.205 CML-6447(006) 514,367 346,598 Highway Planning and Construction 20.205 DEM06L-5934(166) 76,447 - Highway Planning and Construction 20.205 DEM09L-5934(155) 20,002 - Highway Planning and Construction 20.205 HP21L-5934(115) 42,029 - Highway Planning and Construction 20.205 HPLUL-5934 (138) 27,377 - Highway Planning and Construction 20.205 HPLUL-5934 (154) 29,428 - Highway Planning and Construction 20.205 HSIPL-5934 (167) 306,521 - Highway Planning and Construction 20.205 RPSTPLE-5934(162) 37,452 - Highway Planning and Construction 20.205 STPL-5934(165) 3,928 - Highway Planning and Construction 20.205 STPL-5934(171) 1,102,726 - Highway Planning and Construction 20.205 STPL-5934(174) 63,516 - Subtotal Highway Planning and Construction 4,983,951 346,598

Enhanced Mobility of Seniors and Individuals with Disabilities 20.513 SA 642528-10 134,000 - Enhanced Mobility of Seniors and Individuals with Disabilities 20.513 SA 641561-10 105,000 - Subtotal Enhanced Mobility of Seniors and Individuals with Disabilities 239,000 - Passed through State of California Office of Traffic Safety Highway Safety Cluster State and Community Highway Safety 20.600 PS1510 67,815 -

National Priority Safety Programs 20.616 DI1527 73,010 - National Priority Safety Programs 20.616 DI1625 223,276 - National Priority Safety Programs 20.616 PS1622 76,779 - National Priority Safety Programs 20.616 PT1604 66,918 - Subtotal National Priority Safety Programs 439,983 - Subtotal Highway Safety Cluster 507,798 -

Minimum Penalties for Repeat Offenders for Driving While Intoxicated 20.608 AL1531 94,606 - Minimum Penalties for Repeat Offenders for Driving While Intoxicated 20.608 PT1604 71,903 - Subtotal Minimum Penalties for Repeat Offenders for Driving While Intoxicated 166,509 -

Passed through Metropolitan Transportation Commission Highway Research and Development Program 20.200 SHRP2L 6084 (192) 15,778 -

Subtotal pass-through programs 5,913,036 346,598

TOTAL U.S. DEPARTMENT OF TRANSPORTATION 5,962,120 346,598

U.S. DEPARTMENT OF TREASURY Direct Program Equitable Sharing Program 21.unknown -- 215,138 -

TOTAL U.S. DEPARTMENT OF TREASURY 215,138 -

U.S. NATIONAL FOUNDATION FOR THE ARTS AND HUMANITIES Direct Program Promotion of the Arts - Grants to Organizations and Individuals 45.024 -- 132,500 -

TOTAL U.S. NATIONAL FOUNDATION FOR THE ARTS AND HUMANITIES 132,500 -

U.S. SMALL BUSINESS ADMINISTRATION Passed through Humboldt State University Sponsored Programs Foundation Small Business Development Centers 59.037 F0809 99,764 - Small Business Development Centers 59.037 F0907 33,436 -

TOTAL U.S. SMALL BUSINESS ADMINISTRATION 133,200 -

U.S. ENVIRONMENTAL PROTECTION AGENCY Direct Programs Congressionally Mandated Projects 66.202 -- 31,686 - Brownfields Assessment and Cleanup Cooperative Agreements 66.818 -- 47,192 -

Subtotal direct programs 78,878 -

TOTAL U.S. ENVIRONMENTAL PROTECTION AGENCY 78,878 -

U.S. DEPARTMENT OF ENERGY Direct Programs Conservation Research and Development 81.086 -- 12,497 - Renewable Energy Research and Development 81.087 -- 338,946 -

Subtotal direct programs 351,443 -

See accompanying notes to the Schedule of Expenditures of Federal Awards. 169 CITY AND COUNTY OF SAN FRANCISCO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS (Continued) FOR THE YEAR ENDED JUNE 30, 2016

Catalog of Federal Amount Domestic Assistance Pass-Through Federal Provided to Federal Grantor/Pass-Through Grantor/Program Title Number (CFDA) Identifying Number Expenditures Subrecipients U.S. DEPARTMENT OF ENERGY (continued) Passed through California Energy Commission State Energy Program 81.041 400-10-004-08 $ 59,778 $ -

TOTAL U.S. DEPARTMENT OF ENERGY 411,221 -

U.S. DEPARTMENT OF EDUCATION Passed through State of California Department of Rehabilitation Rehabilitation Services - Vocational Rehabilitation Grants to States 84.126 28958 90,400 -

Passed through State of California Department of Education Race to the Top - Early Learning Challenge 84.412 2012-15181-2563-00 1,225,631 1,225,048

TOTAL U.S. DEPARTMENT OF EDUCATION 1,316,031 1,225,048

U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES Direct Programs Environmental Public Health and Emergency Response 93.070 -- 174,042 - Comprehensive Community Mental Health Services for Children with Serious Emotional Disturbances (SED) 93.104 -- 1,295,270 1,044,542 Project Grants and Cooperative Agreements for Tuberculosis Control Programs 93.116 -- 693,626 20,673 Substance Abuse and Mental Health Services - Projects of Regional and National Significance 93.243 -- 904,868 243,436 Adult Viral Hepatitis Prevention and Control 93.270 -- 894,802 - Child Abuse and Neglect Discretionary Activities 93.670 -- 943,370 933,609 PPHF: Racial and Ethnic Approaches to Community Health Program Financed Solely By Public Prevention and Health Funds 93.738 -- 847,271 - Child Health and Human Development Extramural Research 93.865 -- 24,657 - HIV Emergency Relief Project Grants 93.914 -- 16,326,081 13,318,703 Grants to Provide Outpatient Early Intervention Services With Respect to HIV Disease 93.918 -- 344,926 113,974 Special Projects of National Significance 93.928 -- 741,884 541,096 HIV Prevention Activities - Non-Governmental Organization Based 93.939 -- 1,084,047 - HIV Prevention Activities - Health Department Based 93.940 -- 6,561,154 930,213 Human Immunodeficiency Virus (HIV)/Acquired Immunodeficiency Virus Syndrome (AIDS) Surveillance 93.944 -- 1,628,248 - Preventive Health Services - Sexually Transmitted Diseases Control Grants 93.977 -- 1,377,085 133,134

Subtotal direct programs 33,841,331 17,279,380

Passed through State of California Department of Aging Special Programs for the Aging - Title VII, Chapter 3 - Programs for Prevention of Elder Abuse, Neglect, and Exploitation 93.041 AP 1516-06 12,784 12,784 Special Programs for the Aging - Title VII, Chapter 2 - Long Term Care Ombudsman Services for Older Individuals 93.042 AP 1516-06 31,711 31,711 Special Programs for the Aging - Title III, Part D - Disease Prevention and Health Promotion Services 93.043 AP 1516-06 57,608 57,608

Aging Cluster Special Programs for the Aging_Title III, Part B_Grants for Supportive Services and Senior Centers 93.044 AP 1516-06 1,001,145 406,993 Special Programs for the Aging_Title III, Part C_Nutrition Services 93.045 AP 1516-06 1,548,749 1,548,749 Nutrition Services Incentive Program 93.053 AP 1516-06 1,579,308 1,579,308 Subtotal Aging Cluster 4,129,202 3,535,050

National Family Caregiver Support, Title III, Part E 93.052 AP 1516-06 400,415 400,415

Medicare Enrollment Assistance Program 93.071 MI-1415-06 12,404 12,404 Medicare Enrollment Assistance Program 93.071 MI-1517-06 6,969 6,969 Subtotal Medicare Enrollment Assistance Program 19,373 19,373

State Health Insurance Assistance Program 93.324 HI-1516-06 135,116 121,604

Passed through Regents of the University of California Global AIDS 93.067 5745sc 237,954 - Global AIDS 93.067 6925sc 16,681 - Global AIDS 93.067 7076sc 11,892 - Global AIDS 93.067 8145sc 44,204 - Global AIDS 93.067 8775sc 20,404 - Global AIDS 93.067 8817sc 17,997 - Global AIDS 93.067 8846sc 26,431 - Global AIDS 93.067 8853sc 4,754 - Global AIDS 93.067 8860sc 5,039 - Global AIDS 93.067 8940sc 81,117 - Global AIDS 93.067 8941sc 8,864 - Subtotal Global AIDS 475,337 -

Prevention of Disease, Disability, and Death by Infectious Diseases 93.084 8829sc 25,052 -

Coordinated Services and Access to Research for Women, Infants, Children, and Youth 93.153 4899SC 97,531 -

See accompanying notes to the Schedule of Expenditures of Federal Awards. 170 CITY AND COUNTY OF SAN FRANCISCO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS (Continued) FOR THE YEAR ENDED JUNE 30, 2016

Catalog of Federal Amount Domestic Assistance Pass-Through Federal Provided to Federal Grantor/Pass-Through Grantor/Program Title Number (CFDA) Identifying Number Expenditures Subrecipients U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES (continued) Passed through Regents of the University of California (continued) Mental Health Research Grants 93.242 6819SC $ 44,976 $ - Mental Health Research Grants 93.242 6913SC 11,852 - Mental Health Research Grants 93.242 7238SC 75,610 - Drug Abuse and Addiction Research Programs 93.279 8278sc 14,672 - Drug Abuse and Addiction Research Programs 93.279 8952sc 12,958 - Child Welfare Research Training or Demonstration 93.648 00008863 1,067 - Child Welfare Research Training or Demonstration 93.648 00009093 1,321 - Allergy and Infectious Diseases Research 93.855 7254sc 646 - Allergy and Infectious Diseases Research 93.855 7256sc 39,015 - Allergy and Infectious Diseases Research 93.855 8559sc 5,753 -

Passed through State of California Department of Public Health Hospital Preparedness Program (HPP) and Public Health Emergency Preparedness (PHEP) Aligned Cooperative Agreements 93.074 14-10536 1,054,070 - Hospital Preparedness Program (HPP) and Public Health Emergency Preparedness (PHEP) Aligned Cooperative Agreements 93.074 14-10918 60,119 - Immunization Cooperative Agreements 93.268 13-20342 1,579 - Immunization Cooperative Agreements 93.268 15-10447 274,847 - Affordable Care Act (ACA) Maternal, Infant, and Early Childhood Home Visiting Program 93.505 15-10169 1,248,092 - Affordable Care Act (ACA) Maternal, Infant, and Early Childhood Home Visiting Program 93.505 201438 4,948 - Refugee and Entrant Assistance - State Administered Programs 93.566 14-38-90840-00 87,697 10,390 Refugee and Entrant Assistance - State Administered Programs 93.566 15-38-90840-00 258,814 130,671 Medical Assistance Program 93.778 14-10074 150,648 - Medical Assistance Program 93.778 201438 457 - Medical Assistance Program 93.778 201538 4,793,368 - HIV Care Formula Grants 93.917 13-20070 2,960,431 2,425,191 Maternal and Child Health Services Block Grant to the States 93.994 201538 391,537 -

Passed through State of California Department of Social Services Guardianship Assistance 93.090 None 2,141,014 - Promoting Safe and Stable Families 93.556 None 395,838 276,923 Temporary Assistance for Needy Families 93.558 None 63,029,438 9,260,585 Refugee and Entrant Assistance - State Administered Programs 93.566 RESS1406 59,980 - Refugee and Entrant Assistance - State Administered Programs 93.566 None 354,825 - Refugee and Entrant Assistance_Targeted Assistance Grants 93.584 TAFO1406 38,687 - Community-Based Child Abuse Prevention Grants 93.590 None 24,297 24,297 Stephanie Tubbs Jones Child Welfare Services Program 93.645 None 1,355,423 1,089 Foster Care - Title IV-E 93.658 None 37,877,235 5,681,213 Adoption Assistance 93.659 None 9,466,759 - Chafee Foster Care Independence Program 93.674 None 496,997 420,199 Medical Assistance Program 93.778 None 69,000,896 2,888,921

Passed through State of California Department of Mental Health Projects for Assistance In Transition From Homelessness (PATH) 93.150 None 532,625 251,807

Passed through California Family Health Council Family Planning - Services 93.217 380-5320-71209-15 107,408 - Family Planning - Services 93.217 380-5320-71219-16-17 21,222 - Subtotal Family Planning - Services 128,630 -

Passed through San Francisco Community Clinic Consortium Health Center Program (Community Health Centers, Migrant Health Centers, Health Care for the Homeless, and Public Housing Primary Care) 93.224 3 H80CS00049-15-03 537,505 - Health Center Program (Community Health Centers, Migrant Health Centers, Health Care for the Homeless, and Public Housing Primary Care) 93.224 4 H80CS00049-14-05 393,190 - Grants to Provide Outpatient Early Intervention Services with Respect to HIV Disease 93.918 2 H76HA00163-23-00 68,946 - Grants to Provide Outpatient Early Intervention Services with Respect to HIV Disease 93.918 4 H76HA00163-24-03 97,114 -

Passed through Public Health Foundation Enterprise Mental Health Research Grants 93.242 0157.0105 87,813 - Mental Health Research Grants 93.242 0155.0104 51,673 - Mental Health Research Grants 93.242 0176.0104 14,198 - Mental Health Research Grants 93.242 0349.0101 89,260 -

See accompanying notes to the Schedule of Expenditures of Federal Awards. 171 CITY AND COUNTY OF SAN FRANCISCO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS (Continued) FOR THE YEAR ENDED JUNE 30, 2016

Catalog of Federal Amount Domestic Assistance Pass-Through Federal Provided to Federal Grantor/Pass-Through Grantor/Program Title Number (CFDA) Identifying Number Expenditures Subrecipients U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES (continued) Passed through Public Health Foundation Enterprise (continued) Drug Abuse and Addiction Research Programs 93.279 0152.0103 $ 23,952 $ - Drug Abuse and Addiction Research Programs 93.279 0208.0103 37,561 - Drug Abuse and Addiction Research Programs 93.279 0224.0102 43,843 - Drug Abuse and Addiction Research Programs 93.279 0249.0102 30,174 - Drug Abuse and Addiction Research Programs 93.279 0280.0102 27,386 - Drug Abuse and Addiction Research Programs 93.279 0333.0101 31,156 - Subtotal Drug Abuse and Addiction Research Programs 194,072 -

Minority Health and Health Disparities Research 93.307 0350.0101 64,168 - Trans-NIH Research Support 93.310 0304.0101 9,035 - Allergy and Infectious Diseases Research 93.855 0183.0104 11,038 - Allergy and Infectious Diseases Research 93.855 0325 112,940 - Allergy and Infectious Diseases Research 93.855 0014 36,338 -

Passed through University of California San Francisco Mental Health Research Grants 93.242 8533SC 8,258 - PPHF Geriatric Education Centers 93.969 6 U1QHP28727-01-02 11,292 -

Passed through University of Southern California Child Health and Human Development Extramural Research 93.865 61009227 16,571 - Passed through University of Washington Drug Abuse and Addiction Research Programs 93.279 UWSC7756 13,814 -

Passed through State of California Department of Child Support Services Child Support Enforcement 93.563 None 8,294,838 -

Passed through MDRC Community Services Block Grant - Discretionary Awards 93.570 None 89,762 -

Passed through State of California Department of Education CCDF Cluster Child Care and Development Block Grant 93.575 CLPC5036 56,647 - Child Care and Development Block Grant 93.575 CRET5034 523,243 - Subtotal Child Care and Development Block Grant 579,890 -

Child Care Mandatory and Matching Funds of the Child Care and Development Fund 93.596 CAPP-5051 200,658 200,658

Subtotal CCDF Cluster 780,548 200,658 Passed through California Secretary of State Voting Access for Individuals With Disabilities - Grants to States 93.617 14G26134 19,730 -

Passed through Partners in Care Empowering Older Adults and Adults With Disabilities Through Chronic Disease Self-Management Education Programs - Financed By Prevention and Public Health Funds (PPHF) 93.734 CT-1213-11 5,000 5,000

Passed through State of California Department of Health Care Services Medical Assistance Program 93.778 None 1,836,439 116,019 Block Grants for Community Mental Health Services 93.958 None 2,500,398 633,754

Passed through Blood Systems, Inc. Cardiovascular Diseases Research 93.837 10849-DPH-01 1,111 - Blood Diseases and Resources Research 93.839 10849-DPH-01 1,120 - Passed through Family Health International (FHI360) Allergy and Infectious Diseases Research 93.855 0080.0237/104110 11,501 - Allergy and Infectious Diseases Research 93.855 970/0080.0172 35,533 -

Passed through Fred Hutchinson Cancer Research Center Allergy and Infectious Diseases Research 93.855 0000818295 46,096 - Allergy and Infectious Diseases Research 93.855 0000851188 72,617 -

Passed through Magee-Women's Research Institute and Foundation Allergy and Infectious Diseases Research 93.855 9335 23,428 - Allergy and Infectious Diseases Research 93.855 9394 24,344 - Subtotal Allergy and Infectious Diseases Research 213,519 -

Passed through California Department of Alcohol and Drug Programs Block Grants for Prevention and Treatment of Substance Abuse 93.959 None 12,406,249 12,406,249

Total pass-through programs 229,747,189 38,911,511

TOTAL U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES 263,588,520 56,190,891

U.S. DEPARTMENT OF HOMELAND SECURITY Direct Programs Assistance to Firefighters Grant 97.044 -- 1,007,920 - Port Security Grant Program 97.056 -- 3,991,838 - Staffing for Adequate Fire and Emergency Response (SAFER) 97.083 -- 1,649,819 -

Subtotal direct programs 6,649,577 -

See accompanying notes to the Schedule of Expenditures of Federal Awards. 172 CITY AND COUNTY OF SAN FRANCISCO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS (Continued) FOR THE YEAR ENDED JUNE 30, 2016

Catalog of Federal Amount Domestic Assistance Pass-Through Federal Provided to Federal Grantor/Pass-Through Grantor/Program Title Number (CFDA) Identifying Number Expenditures Subrecipients U.S. DEPARTMENT OF HOMELAND SECURITY (continued) Passed through California Emergency Management Agency Emergency Management Performance Grants 97.042 075-00000 $ 300,237 $ - Pre-Disaster Mitigation 97.047 LPDM-09-CA-2008 523,354 -

Homeland Security Grant Program 97.067 075-00000 1,073,613 - Homeland Security Grant Program 97.067 2013-00110 13,341 - Homeland Security Grant Program 97.067 2014-00093 18,264,553 12,471,955 Homeland Security Grant Program 97.067 2015-00078 4,089,659 2,512,681 Subtotal Homeland Security Grant Program 23,441,166 14,984,636

Passed through Marine Exchange of the San Francisco Bay Port Security Grant Program 97.056 2011-PU-K00351 84,664 - Port Security Grant Program 97.056 EMW-2011-PU-K00351 83,133 - Total Port Security Grant Program 167,797 -

Total pass-through programs 24,432,554 14,984,636

TOTAL U.S. DEPARTMENT OF HOMELAND SECURITY 31,082,131 14,984,636

TOTAL EXPENDITURES OF FEDERAL AWARDS $411,590,193 $ 98,273,438

See accompanying notes to the Schedule of Expenditures of Federal Awards. 173 CITY AND COUNTY OF SAN FRANCISCO NOTES TO THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED JUNE 30, 2016

1. GENERAL The schedule of expenditures of federal awards (Schedule) includes the federal grant activity of the City and County of San Francisco (City). All federal awards received directly from federal agencies as well as federal awards passed through other non-federal agencies are included in this Schedule except for assistance related to Medical Assistance (Medi-Cal) and Medicare Hospital Insurance (Medicare) (see Note 4).

2. BASIS OF ACCOUNTING The accompanying Schedule is presented using the modified accrual basis of accounting for program expenditures accounted for in the governmental funds and the accrual basis of accounting for program expenditures accounted for in the proprietary funds as described in Note 2(b) of the City’s basic financial statements, with the exception of the Economic Adjustment Assistance Program described in Note 5. The City did not elect to use the 10% de minimis cost rate as covered in U.S. Code of Federal Regulations, Title 2 section 200.414 Indirect (F&A) costs.

3. RELATIONSHIP TO FEDERAL FINANCIAL REPORTS AND BASIC FINANCIAL STATEMENTS Expenditures of federal awards are reported in the City’s basic financial statements as expenditures in the governmental funds, and as expenses for noncapital expenditures and as additions to capital assets for capital related expenditures in the proprietary-type funds. Amounts reported in the accompanying Schedule agree or can be reconciled with amounts reported in the related federal award reports and the City’s basic financial statements.

4. MEDI-CAL AND MEDICARE Direct Medi-Cal and Medicare expenditures are excluded from the Schedule. These expenditures represent fees for services and are not included in the Schedule or in determining major programs. The City assists the State in determining eligibility and provides Medi-Cal and Medicare services through City-owned facilities. Administrative costs related to Medi-Cal and Medicare are, however, included in the Schedule under the Medical Assistance Program (CFDA number 93.778).

5. ECONOMIC ADJUSTMENT ASSISTANCE PROGRAM For the purpose of calculating federal expenditures for the Schedule, grants for revolving loan funds (RLF) under the Economic Adjustment Assistance Program (CFDA number 11.307) are calculated as the federal share of the sum of RLF loans outstanding at the end of the fiscal year, cash and investment balance in the RLF at the end of the fiscal year, administrative expenses paid out of RLF income during the year, and the unpaid principal of all loans written off during the year.

The City incurred $420,520 of expenditures under two separate Economic Adjustment Assistance Program grants. The Port of San Francisco received a non-RLF grant and incurred program expenditures of $76,130 during the year. The Mayor’s Office of Housing received a RLF grant and calculated federal expenditures for the year using the formula in the preceding paragraph. As of June 30, 2016, the total outstanding RLF and cash and investments in the RLF were $301,290 and $88,083, respectively. There were no administrative expenses paid out of the RLF income, and the unpaid principal of loan written off during the year was $142,093. The federal share of the RLF was 64.8% and federal expenditures of $344,390 were included in the Schedule.

174 CITY AND COUNTY OF SAN FRANCISCO NOTES TO THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS (Continued) FOR THE YEAR ENDED JUNE 30, 2016

6. CALIFORNIA DEPARTMENT OF AGING (CDA) SINGLE AUDIT REPORTING REQUIREMENTS The terms and conditions of agency contracts with CDA require agencies to display state-funded expenditures discretely along with the related federal expenditures. CDA grant expenditures that involve federal funding have been presented in the Schedule. The following schedule is presented using the modified accrual basis of accounting. For state grants not involving federal funding, the amounts are to be displayed separately. The following schedule is presented to comply with these requirements.

Federal Grantor Pass-through Grantor Grant / CFDA Expenditures Program Title Contract No. No. State Federal U.S. Department of Agriculture Passed through State of California, Department of Aging State Administrative Matching Grants for the Supplemental Nutrition Assistance Program SP-1415-06 10.561 $ - $ 96,913 Supplemental Nutrition Assistance Program SP-1516-06 10.561 - 25,879

U.S. Department of Health and Human Services Passed through State of California, Department of Aging Special Programs for the Aging-Title VII, Chapter 3 - Programs for Prevention of Elder Abuse, Neglect, and Exploitation AP-1516-06 93.041 - 12,784 Special Programs for the Aging-Title VII, Chapter 2 - Long Term Care Ombudsman Services for Older Individuals AP-1516-06 93.042 - 31,711 Special Programs for the Aging-Title III, Part D - Disease Prevention and Health Promotion Services AP-1516-06 93.043 - 57,608 Special Programs for the Aging-Title III, Part B - Grants for Supportive Services and Senior Centers AP-1516-06 93.044 - 1,001,145 Special Programs for the Aging-Title III, Part C - Nutrition Services AP-1516-06 93.045 494,922 1,548,749 National Family Caregiver Support, Title III, Part E AP-1516-06 93.052 - 400,415 Nutrition Services Incentive Program AP-1516-06 93.053 - 1,579,308 Medicare Enrollment Assistance Program MI-1415-06 93.071 - 12,404 Medicare Enrollment Assistance Program MI-1517-06 93.071 - 6,969 State Health Insurance Assistance Program HI-1516-06 93.324 229,076 135,116 723,998 $ 4,909,001

State Award - California Department of Aging Special Deposit Fund-Federal Citation Penalties Account, General Fund Allocation AP-1516-06 48,750 Skilled Nursing Facility (SNF) Quality & Accountability Fund (QAF) Allocation AP-1516-06 26,477 Ombudsman State General Fund AP-1516-06 13,935 Ombudsman Public Health L&C Program Fund AP-1516-06 5,574 Total Expenditures of CDA Awards $ 818,734

175 CITY AND COUNTY OF SAN FRANCISCO NOTES TO THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS (Continued) FOR THE YEAR ENDED JUNE 30, 2016

7. PROGRAM TOTALS The following table summarizes programs funded by various sources or grants whose totals are not shown on the Schedule.

CFDA no. / Program Title / Pass-Through Federal Federal Grantor or Pass-Through Grantor Identifying Number Expenditures

(1) CFDA no. 10.557 - Special Supplemental Nutrition Program for Women, Infants, and Children State of California Department of Public Health 14-10226 $ 702,159 State of California Department of Public Health 15-10059 2,030,897 Program Total$ 2,733,056

(2) CFDA no. 10.561 - State Administrative Matching Grants for the Supplemental Nutrition Assistance Program State of California Department of Public Health 13-20505 $ 1,233,973 State of California Department of Aging SP-1415-06 96,913 State of California Department of Aging SP-1516-06 25,879 State of California Department of Social Services None 34,286,102 Program Total$ 35,642,867

(3) CFDA no. 16.738 - Edward Byrne Memorial Justice Assistance Grant Program U.S. Department of Justice -- $ 669,754 Board of State and Community Corrections 650-14 436,732 Board of State and Community Corrections 650-15 412,208 Program Total$ 1,518,694

(4) CFDA no. 17.268 - H-1B Job Training Grants U.S. Department of Labor -- $ 27,392 NOVA Workforce Board 001-RTW-15 405,768 WestEd s12-053 137,738 Program Total$ 570,898

(5) CFDA no. 93.074 - Hospital Preparedness Program (HPP) and Public Health Emergency Preparedness (PHEP) Aligned Cooperative Agreements State of California Department of Public Health 14-10536 $ 1,054,070 State of California Department of Public Health 14-10918 60,119 Program Total$ 1,114,189

(6) CFDA no. 93.224 - Consolidated Health Centers (Community Health Centers, Migrant Health Centers, Health Care for the Homeless, and Public Housing Primary Care) San Francisco Community Clinic Consortium 3 H80CS00049-15-03$ 537,505 San Francisco Community Clinic Consortium 4 H80CS00049-14-05 393,190 Program Total$ 930,695

176 CITY AND COUNTY OF SAN FRANCISCO NOTES TO THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS (Continued) FOR THE YEAR ENDED JUNE 30, 2016

7. PROGRAM TOTALS (Continued) CFDA no. / Program Title / Pass-Through Federal Federal Grantor or Pass-Through Grantor Identifying Number Expenditures

(7) CFDA no. 93.242 - Mental Health Research Grants Regents of the University of California 6819SC $ 44,976 Regents of the University of California 6913SC 11,852 Regents of the University of California 7238SC 75,610 Public Health Foundation Enterprise 0157.0105 87,813 Public Health Foundation Enterprise 0155.0104 51,673 Public Health Foundation Enterprise 0176.0104 14,198 Public Health Foundation Enterprise 0349.0101 89,260 University of California San Francisco 8533SC 8,258 Program Total$ 383,640

(8) CFDA no. 93.268 - Immunization Cooperative Agreements State of California Department of Public Health 13-20342 $ 1,579 State of California Department of Public Health 15-10447 274,847 Program Total$ 276,426

(9) CFDA no. 93.279 - Drug Abuse and Addiction Research Programs Regents of the University of California 8278sc $ 14,672 Regents of the University of California 8952sc 12,958 Public Health Foundation Enterprise 0152.0103 23,952 Public Health Foundation Enterprise 0208.0103 37,561 Public Health Foundation Enterprise 0224.0102 43,843 Public Health Foundation Enterprise 0249.0102 30,174 Public Health Foundation Enterprise 0280.0102 27,386 Public Health Foundation Enterprise 0333.0101 31,156 University of Washington UWSC7756 13,814 Program Total$ 235,516

(10) CFDA no. 93.505 - Affordable Care Act (ACA) Maternal, Infant, and Early Childhood Home Visiting Program State of California Department of Public Health 15-10169 $ 1,248,092 State of California Department of Public Health 201438 4,948 Program Total$ 1,253,040

(11) CFDA no. 93.566 - Refugee and Entrant Assistance - State Administered Programs State of California Department of Public Health 14-38-90840-00 $ 87,697 State of California Department of Public Health 15-38-90840-00 258,814 State of California Department of Social Services RESS1406 59,980 State of California Department of Social Services None 354,825 Program Total$ 761,316

(12) CFDA no. 93.648 - Child Welfare Research Training or Demonstration Regents of the University of California 00008863 $ 1,067 Regents of the University of California 00009093 1,321 Program Total$ 2,388

177 CITY AND COUNTY OF SAN FRANCISCO NOTES TO THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS (Continued) FOR THE YEAR ENDED JUNE 30, 2016

7. PROGRAM TOTALS (Continued) CFDA no. / Program Title / Pass-Through Federal Federal Grantor or Pass-Through Grantor Identifying Number Expenditures

(13) CFDA no. 93.778 - Medical Assistance Program State of California Department of Public Health 14-10074 $ 150,648 State of California Department of Public Health 201438 457 State of California Department of Public Health 201538 4,793,368 State of California Department of Social Services None 69,000,896 State of California Department of Health Care Services None 1,836,439 Program Total$ 75,781,808

(14) CFDA no. 93.855 - Allergy and Infectious Diseases Research Regents of the University of California 7254sc $ 646 Regents of the University of California 7256sc 39,015 Regents of the University of California 8559sc 5,753 Public Health Foundation Enterprise 0183.0104 11,038 Public Health Foundation Enterprise 0325 112,940 Public Health Foundation Enterprise 0014 36,338 Family Health International (FHI360) 0080.0237/104110 11,501 Family Health International (FHI360) 970/0080.0172 35,533 Fred Hutchinson Cancer Research Center 0000818295 46,096 Fred Hutchinson Cancer Research Center 0000851188 72,617 Magee-Women's Research Institute and Foundation 9335 23,428 Magee-Women's Research Institute and Foundation 9394 24,344 Program Total$ 419,249

(15) CFDA no. 93.865 - Child Health and Human Development Extramural Research U.S. Department of Health and Human Services -- $ 24,657 University of Southern California 61009227 16,571 Program Total$ 41,228

(16) CFDA no. 93.918 - Grants to Provide Outpatient Early Intervention Services with Respect to HIV Disease U.S. Department of Health and Human Services -- $ 344,926 San Francisco Community Clinic Consortium 2 H76HA00163-23-00 68,946 San Francisco Community Clinic Consortium 4 H76HA00163-24-03 97,114 Program Total$ 510,986

(17) CFDA no. 97.056 - Port Security Grant Program U.S. Department of Homeland Security -- $ 3,991,838 Marine Exchange of the San Francisco Bay 2011-PU-K00351 84,664 Marine Exchange of the San Francisco Bay EMW-2011-PU-K00351 83,133 Program Total$ 4,159,635

178 Century City

Los Angeles

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San Diego

Independent Auditor’s Report on Internal Control Over Financial Reporting and San Francisco

on Compliance and Other Matters Based on an Audit of Financial Statements Walnut Creek Performed in Accordance With Government Auditing Standards Woodland Hills The Honorable Mayor Edwin Lee The Honorable Members of the Board of Supervisors City and County of San Francisco, California

We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate discretely presented component unit and remaining fund information of the City and County of San Francisco, California (City), as of and for the year ended June 30, 2016, and the related notes to the financial statements, which collectively comprise the City’s basic financial statements, and have issued our report thereon dated November 18, 2016, except for our report on the schedule of expenditures of federal awards, as to which the date is January 20, 2017. Our report includes a reference to other auditors who audited the financial statements of the San Francisco County Transportation Authority, San Francisco International Airport, San Francisco Water Enterprise, Hetch Hetchy Water and Power, San Francisco Municipal Transportation Agency, San Francisco Wastewater Enterprise, and the Health Service System, as described in our report on the City’s financial statements. This report does not include the results of the other auditors’ testing of internal control over financial reporting or compliance and other matters that are reported on separately by those auditors.

Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the City’s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City’s internal control. Accordingly, we do not express an opinion on the effectiveness of the City’s internal control.

A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified.

Compliance and Other Matters As part of obtaining reasonable assurance about whether the City’s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those

Macias Gini & O’Connell LLP 315 Montgomery Street, Suite 806 San Francisco CA 94104 www.mgocpa.com 179 provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.

Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the City’s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity’s internal control and compliance. Accordingly, this communication is not suitable for any other purpose.

San Francisco, California November 18, 2016

180 Century City

Los Angeles

Newport Beach

Oakland

Sacramento

San Diego

Independent Auditor’s Report on Compliance for Each Major Federal Program and San Francisco

Report on Internal Control Over Compliance Required by the Uniform Guidance Walnut Creek

The Honorable Mayor Edwin Lee Woodland Hills The Honorable Members of the Board of Supervisors City and County of San Francisco, California

Report on Compliance for Each Major Federal Program

We have audited the City and County of San Francisco, California’s (City) compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on each of the City’s major federal programs for the year ended June 30, 2016. The City’s major federal programs are identified in the summary of auditor’s results section of the accompanying schedule of findings and questioned costs.

The City’s basic financial statements include the operations of the San Francisco County Transportation Authority (Authority), the San Francisco International Airport (Airport), the San Francisco Municipal Transportation Agency (MTA), and the Successor Agency to the San Francisco Redevelopment Agency (Successor Agency), which expended $17,924,444, $344, $ $311,029,783, and $9,015,036, respectively, in federal awards, which are not included in the City’s schedule of expenditures of federal awards for the year ended June 30, 2016. Our audit, described below, did not include the operations of these organizations. We were engaged to perform an audit in accordance with Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), and report on the results separately to the Successor Agency. The Authority, the Airport, and the MTA engaged other auditors to perform an audit in accordance with the Uniform Guidance.

Management’s Responsibility Management is responsible for compliance with federal statutes, regulations, and the terms and conditions of its federal awards applicable to its federal programs.

Auditor’s Responsibility Our responsibility is to express an opinion on compliance for each of the City’s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of the Uniform Guidance. Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the City’s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of the City’s compliance.

Macias Gini & O’Connell LLP 315 Montgomery Street, Suite 806 San Francisco CA 94104 www.mgocpa.com 181

Basis for Qualified Opinion on the Assistance to Firefighters Grant and the Home Investment Partnership Program As described in findings 2016-001 and 2016-002 in the accompanying schedule of findings and questioned costs, the City did not comply with requirements regarding the following: Finding No. CFDA No. Program Name Compliance Requirement 2016-001 97.044 Assistance to Firefighters Grant Procurement 2016-002 14.239 Home Investment Partnership Program Special Tests and Provision – Maximum Per-Unit Subsidy and Underwriting Requirements Compliance with such requirements is necessary, in our opinion, for the City to comply with the requirements applicable to these programs.

Qualified Opinion on the Assistance to Firefighters Grant and the Home Investment Partnership Program In our opinion, except for the noncompliance described in the Basis for Qualified Opinion paragraph, the City complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on the Assistance to Firefighters Grant and the Home Investment Partnership Program for the year ended June 30, 2016.

Unmodified Opinion on Each of the Other Major Federal Programs In our opinion, the City complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its other major federal programs identified in the summary of auditor’s results section of the accompanying schedule of findings and questioned costs for the year ended June 30, 2016.

Other Matters The results of our auditing procedures disclosed another instance of noncompliance, which is required to be reported in accordance with the Uniform Guidance and which is described in the accompanying schedule of findings and questioned costs as item 2016-003. Our opinion on each major federal program is not modified with respect to this matter.

The City’s responses to the noncompliance findings identified in our audit are described in the accompanying schedule of findings and questioned costs. The City’s responses were not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the responses.

Report on Internal Control over Compliance

Management of the City is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the City’s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the City’s internal control over compliance.

Our consideration of internal control over compliance was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. However, as discussed below, we identified certain deficiencies in internal control over compliance that we consider to be material weaknesses and significant deficiencies.

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A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. We consider the deficiency in internal control over compliance described in the accompanying schedule of findings and questioned costs as item 2016-002 to be a material weakness.

A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. We consider the deficiencies in internal control over compliance described in the accompanying schedule of findings and questioned costs as items 2016-001 and 2016-003 to be significant deficiencies.

The City’s responses to the internal control over compliance findings identified in our audit are described in the accompanying schedule of findings and questioned costs. The City’s responses were not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the responses.

The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose.

San Francisco, California January 20, 2017

183

SCHEDULE OF FINDINGS AND QUESTIONED COSTS

CITY AND COUNTY OF SAN FRANCISCO SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2016

Section I – Summary of Auditor’s Results

Financial Statements: Type of auditor’s report issued on whether the financial statements audited were prepared in accordance with accounting principles generally accepted in the United States of America: ...... Unmodified Internal control over financial reporting:  Material weakness(es) identified? ...... No  Significant deficiency(ies) identified? ...... None reported Noncompliance material to financial statements noted? ...... No

Federal Awards: Internal control over major programs:  Material weakness(es) identified? ...... Yes  Significant deficiency(cies) identified? ...... Yes Type of auditor’s report issued on compliance for major programs ...... Unmodified for all major programs except for the procurement requirement of the Assistance to Firefighters Grant (CFDA No. 97.044) and the Maximum Per-Unit Subsidy and Underwriting Requirements of the Home Investment Partnership Program (CFDA No. 14.239), which were qualified. Any audit findings disclosed that are required to be reported in accordance with 2 CFR 200.516(a)? ...... Yes

Identification of major programs: Name of Federal Program or Cluster CFDA Number(s) Community Development Block Grants/Entitlement Grants...... 14.218 Home Investment Partnerships Program ...... 14.239 Highway Planning and Construction ...... 20.205 Aging Cluster ...... 93.044, 93.045, 93.053 HIV Emergency Relief Project Grants ...... 93.914 HIV Prevention Activities - Health Department Based ...... 93.940 Block Grants for Community Mental Health Services ...... 93.958 Block Grants for Prevention and Treatment of Substance Abuse ...... 93.959 Assistance to Firefighters Grant ...... 97.044 Homeland Security Grant Program ...... 97.067 Staffing for Adequate Fire and Emergency Response (SAFER) ...... 97.083

Dollar threshold used to distinguish between Types A and B programs $3,000,000 Auditee qualified as a low-risk auditee? ...... Yes

184 CITY AND COUNTY OF SAN FRANCISCO SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2016

Section II – Financial Statement Findings

None reported.

Section III – Federal Award Findings and Questioned Costs

Item No. 2016-001 – Procurement and Suspension and Debarment Significant Deficiency and Material Noncompliance

Federal Program Title: Assistance to Firefighters Grant Federal Catalog Number(s): 97.044 Federal Agency: U.S. Department of Homeland Security Federal Award Number(s): EMW-2013-FO-07019

Criteria: Pursuant to the Code of Federal Regulations (CFR), Title 2 Grants and Agreements, Section 215.43 Competition, all procurement transactions shall be conducted in a manner to provide, to the maximum extent practical, open and free competition. The grant recipient shall be alert to organizational conflicts of interest as well as noncompetitive practices among contractors that may restrict or eliminate competition or otherwise restrain trade. Awards shall be made to the bidder or offeror whose bid or offer is responsive to the solicitation and is most advantageous to the recipient, price, quality and other factors considered.

The San Francisco Administrative Code, Chapter 21 Acquisition of Commodities and Services, also requires a requesting department that needs a commodity or service which is unique and which is known to be provided by only one contractor, to submit documentation to the Purchasing Division to justify the transaction as a sole source. It shall constitute official misconduct to divide any proposed procurement in excess of the Minimum Competitive Amount ($110,000 for professional services) into two or more units for the purpose of evading the City’s competitive solicitation requirements.

In addition, CFR Title 2, section 215.46 Procurement Records requires procurement records and files for purchases in excess of the small purchase threshold to include the following at a minimum: (a) basis for contractor selection; (b) justification for lack of competition when competitive bids or offers are not obtained; and (c) basis for award cost or price.

Condition: The City’s Fire Department purchased various parts and equipment for fire exhaust systems, and utilized two contractors who were authorized by the equipment distributor to install and service such equipment. However, the Fire Department did not follow the City’s procurement process in soliciting bids for these services. In addition, the Fire Department used purchase orders as a mechanism to track expenditures by station for final grant reporting, and thus effectively circumvented the procurement process by paying the two respective contractors $214,832 under 57 purchase orders and $68,256 under 12 purchase orders. This is not a repeat of a finding from the 2014-15 single audit.

Cause: The Fire Department purchased the parts and equipment from the manufacturer of the existing systems, and obtained prior approval from the Federal Emergency Management Agency (FEMA). Due to warranty requirements, the manufacturer indicated two contractors in the San Francisco Bay Area as approved installers for the parts. Because the Fire Department had FEMA’s approval to purchase the parts under a sole source arrangement, the Department assumed the limited procurement for installation services would be supported.

Effect: The Fire Department did not follow procurement requirements to ensure open and full competition, or otherwise obtain proper approval for awarding contracts under limited competition.

185 CITY AND COUNTY OF SAN FRANCISCO SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2016

Section III – Federal Award Findings and Questioned Costs

Item No. 2016-001 – Procurement and Suspension and Debarment (continued)

Questioned Costs: The population of expenditures subject to the procurement requirement in fiscal year 2015-16 included 4 contractors with total expenditures of $1,007,920. We selected the two contractors with the highest expenditure amounts, which covered $897,868 of the population. The sample is not considered statistically valid.

Total payments made to the contractors in question were $283,088.

Recommendation: We recommend the Fire Department revisit its procurement procedures to ensure that each procurement is separately evaluated in accordance with applicable federal procurement requirements and the City’s procurement policies.

Management Response and Corrective Action: The Fire Department concurs that in this cause noted there was no specific prior approval from FEMA for awarding the installation services under limited competition. Regarding the questioned costs, the Fire Department also concurs. In complying with FEMA’s request to track the expenditures by station for final reporting and reimbursement, the program manager at the time chose to accomplish this by issuing purchase orders for each station to track the work in that manner. Given resource and scheduling capabilities of the two vendors, the Fire Department divided the work amongst the two approved vendors to ensure completion by the end of the performance period. Grant funds were spent on appropriate items per the scope of the grant. The Fire Department notified FEMA in October 2016.

To ensure proper oversight of the procurement processes and grant compliance requirements, the Fire Department is taking the following corrective action: 1) Facilitate the filling of vacant analyst positions to provide much-needed resources to assist with the procurement process. 2) Require current employees involved with the grant and procurement processes to complete refresher training by June 30, 2017. 3) Incorporate grant and procurement processes in the new employee orientation training curriculum by June 30, 2017. 4) Update current grant policies and procedures to require the grant manager meet with Finance and Accounting staff at time of grant award to discuss and resolve any potential procurement challenges, and contact funding agency with any questions (as needed).

Contact person(s) responsible for corrective action: Mark Corso, Finance and Planning, San Francisco Fire Department

186 CITY AND COUNTY OF SAN FRANCISCO SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2016

Section III – Federal Award Findings and Questioned Costs

Item No. 2016-002 – Special Tests and Provision – Maximum Per-Unit Subsidy and Underwriting Requirements Material Weakness and Material Noncompliance

Federal Program Title: Home Investment Partnership Program Federal Catalog Number(s): 14.239 Federal Agency: U.S. Department of Housing and Urban Development Federal Award Number(s): M15-MC060213

Criteria: Title 24 Housing and Urban Development, section 92.250 Maximum Per-Unit Subsidy Amount, Underwriting, and Subsidy Layering of the Code of Federal Regulation requires the total amount of Home Investment Partnership Program (HOME) funds that a participating jurisdiction may invest on a per-unit basis in affordable housing may not exceed the per-unit dollar limitations established under section 221(d)(3)(ii) of the National Housing Act for elevator-type projects that apply to the area in which the housing is located.

Due to the discontinuation of the Section 221(d)(3) mortgage insurance program, the U.S. Department of Housing and Urban Development (HUD) published CPD Notice 15-003 in March 2015 to establish an interim policy that directed participating jurisdictions to use the Section 234-Condominium Housing basic mortgage limits, for elevator-type projects, as an alternative to the Section 221(d)(3) limits. This interim policy remains in effect until the effective date of the new final rule provisions, amending the existing provisions of 24 CFR 92.250(a).

Condition: The City’s Mayor’s Office of Housing and Community Development (MOHCD) provided a loan to one project that was subject to the maximum per-unit subsidy amount requirement during the year. Based on the number of units within its development, the project was limited to a maximum per-unit subsidy of $6,976,330. However, the actual HOME-funded portion of the loan was $8,134,000.

This is not a repeat of a finding from the 2014-15 single audit.

Cause: MOHCD verified that the initial requested loan amount of $4,300,000 complied with the maximum per-unit subsidy, but subsequently increased the HOME-funded portion of the project to $8,134,000 due to higher construction costs resulting from delays caused by litigation and other matters. The increased loan amount includes contingencies as well as conservative estimates of costs. The division responsible for calculating and monitoring the maximum per-unit subsidy was aware the increased funding exceeded the limit, and approved the subsidy with a provision in the loan agreement that requires the developer, at the completion of construction, to return any excess funds to the City. If the repayment of any excess funds does not reduce the loan amount below the limit, MOHCD will reduce HOME funds and increase local dollars to meet the maximum per-unit subsidy requirement.

Effect: MOHCD is not in compliance with the maximum per-unit subsidy requirement. Despite the provision in the loan agreement that requires the developer to repay excess funding and to reduce HOME funds as necessary at the end of the project, the loan was funded during the year in excess of the established limit.

Questioned Costs: The project included HOME funds of $8,134,000, which exceeded the maximum per-unit subsidy of $6,976,330 by $1,157,670.

187 CITY AND COUNTY OF SAN FRANCISCO SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2016

Section III – Federal Award Findings and Questioned Costs

Recommendation: We recommend MOHCD evaluate its policies and procedures on the maximum per-unit subsidy requirement for areas of clarification and improvement, and communicate any changes to all affected parties. MOHCD should seek pre-approval from HUD if HOME-funded projects will potentially exceed the established limits.

Management Response and Corrective Action: MOHCD concurs with the finding and has completed the following corrective actions:

1) In order to correct the questioned costs for this project, MOHCD replaced $1,157,670 of HOME funds in the project loan with local dollars. The $1,157,670 of HOME funds was returned to HUD on December 16, 2016, and HUD placed the returned amount in MOHCD’s HOME line of credit for future eligible projects. 2) To strengthen oversight controls, MOHCD implemented the following additional three confirmation mechanisms on January 1, 2017: a. When HOME is identified as a funding source in a Loan Evaluation, the Loan Evaluation template prompts the Project Manager to add a section to the loan evaluation called “HOME Limit Compliance.” In that section, the Project Manager demonstrates that the anticipated HOME loan does not cause the project to exceed the Maximum Per-Unit Subsidy. The “HOME Limit Compliance” test is also required when there is a subsequent change in funding and/or number of units. The department will not make exceptions to this section of the Loan Evaluation. b. Before the Loan Administrator makes a request to Fiscal team to encumber HOME funds, the Loan Administrator will request documentation from Project Manager to demonstrate that the project does not exceed the Maximum Per-Unit Subsidy. The documentation must be provided to the Fiscal team as part of the encumbrance request. The Deputy Director for Finance and Administration will review “HOME Limit Compliance” before funds are encumbered. c. On an annual basis, the Director of Housing Development will prompt Project Managers with anticipated HOME loans to complete a HOME Subsidy Limit Compliance test for the anticipated HOME loans.

Contact person(s) responsible for corrective action: Benjamin McCloskey, Deputy Director for Finance and Administration, MOHCD

188 CITY AND COUNTY OF SAN FRANCISCO SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2016

Section III – Federal Award Findings and Questioned Costs

Item No. 2016-003 – Reporting Significant Deficiency and Noncompliance

Federal Program Title: Community Development Block Grants/Entitlement Grants Federal Catalog Number(s): 14.218 Federal Agency: U.S. Department of Housing and Urban Development Federal Award Number(s): B-14-MC-06-0016, B-15-MC-06-0016

Federal Program Title: Home Investment Partnership Program Federal Catalog Number(s): 14.239 Federal Agency: U.S. Department of Housing and Urban Development Federal Award Number(s): M14-MC060213, M15-MC060213

Criteria: Pursuant to Code of Federal Regulations (CFR), Title 24 Housing and Urban Development, Part 135 Economic Opportunities for Low- and Very Low-Income Persons, for each grant over $200,000 that involves housing rehabilitation, housing construction, or other public construction, the prime grant recipient must submit Form HUD 60002, Section 3 Summary Report, Economic Opportunities for Low- and Very Low- Income Persons. The purpose of Form HUD 60002 is to report annual accomplishments regarding employment and other economic opportunities provided to low- and very low-income persons under Section 3 of the Housing and Urban Development Act of 1968. The prime recipient must report its project status or an explanation of not meeting the goals.

Furthermore, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (specifically, CFR Title 2, section 200.303) requires a non-federal entity to establish and maintain effective internal control over the federal award that provides reasonable assurance that the non-federal entity is managing the federal award in compliance with federal statutes, regulations, and the terms and conditions of the federal award. These internal controls should be in compliance with guidance in “Standards for Internal Control in the Federal Government” issued by the Comptroller General of the United States or the “Internal Control Integrated Framework”, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Condition: During our testing of the annual Form HUD 60002 for the each of the two programs, we identified the following errors:

 For the Community Development Block Grants/Entitlement Grants, the number of total Section 3 trainees was understated by 1 individual.  For the Home Investment Partnership Program, the number of Section 3 new hires was overstated by 3 individuals. The U.S. Office of Management and Budget (OMB) has identified the number of new hires that meet the definition of a Section 3 resident as critical information.

This is not a repeat of a finding from the 2014-15 single audit.

Cause: The errors were caused by miscalculations from the supporting data.

Effect: The reported information was inaccurate.

Questioned Costs: None.

189 CITY AND COUNTY OF SAN FRANCISCO SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2016

Section III – Federal Award Findings and Questioned Costs

Recommendation: We recommend the Mayor’s Office of Housing and Community Development evaluate its reporting procedures to ensure submitted reports include all required information, be mathematically accurate, supported by underlying data, and summarized in accordance with the required criteria and methodology.

Management Response and Corrective Action: The Mayor’s Office of Housing and Community Development (MOHCD) concurs with the finding. The department has completed the following corrective actions:

1) MOHCD is working with HUD to correct the Form HUD 60002 reports in HUD’s online reporting system and anticipates that this process will be completed no later than March 31, 2017. 2) The errors on Form HUD 60002 for the 2015-2016 CDBG and the 2015-2016 HOME programs were due to miscalculations from compiling project-level supporting data collected using a variety of spreadsheets. To strengthen oversight and minimize the chance of future calculation errors, MOHCD began using a web-based database, Elation, to track the data required for the HUD 60002 report starting on July 1, 2016. MOHCD staff is working with Elation Systems to create a report that includes all of the data required by the Form HUD 60002, and that work will be completed no later than September 30, 2017. Use of this system and report will remove several manual compilation and calculation steps and ensure that the data submitted on Form HUD 60002 will be accurate and supported by the underlying data in the system. The Deputy Director for Finance and Administration will review Form HUD 60002 before it is submitted.

Contact person(s) responsible for corrective action: Benjamin McCloskey, Deputy Director for Finance and Administration, MOHCD

190 CITY AND COUNTY OF SAN FRANCISCO STATUS OF PRIOR YEAR’S FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2016

Reference Number: 2015-001 Information Technology Governance

Audit Finding: The City operated under a decentralized structure wherein departments independently establish information technology (IT) policies and procedures according to their operations. This decentralized IT environment contributed to inconsistent IT controls being utilized throughout the City’s IT environment. We recommended that the City prioritize the drafting and release of formal information technology policies and procedures to be used as a guideline by all City departments to establish basic level IT controls citywide.

Status of Corrective Corrective action was implemented. Action:

Reference Number: 2015-002 Year-End Closing Process

Audit Finding: Certain City departments utilize the accounting services of the General Services Agency (GSA) to record financial transactions into the City’s general ledger. The process often begins with a request and approval from the department to the GSA, who then reviews and inputs the entries into the system. For year-end financial reporting, the costs of all services and purchases received or rendered by the City should be captured in the financial statements in accordance with generally accepted accounting principles. During our audit, we identified several transactions of varying amounts and reporting funds that were not recorded in the proper fiscal period. Those transactions relate to departments that do not have their own fiscal staff, and thus require the GSA’s assistance in recording fiscal transactions in the City’s general ledger. The missing accruals were identified through the Controller’s Office’s internal review and our audit procedures. While the adjustments were not considered material to the City’s financial statements as a whole, resolution of such adjustments required additional time and resources that could potentially delay the City’s financial reporting process. We recommend that the GSA and affected departments establish communication protocols such that all necessary entries are captured for year-end financial reporting by the City’s internal closing timeline.

Corrective Action: The Controller’s Office will work with the GSA to implement a process to ensure that the necessary year-end financial entries are identified and accurately recorded within the City’s internal closing timeline.

Status of Corrective Corrective action was implemented. Action:

191 CITY AND COUNTY OF SAN FRANCISCO STATUS OF PRIOR YEAR’S FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2016

Reference Number: 2015-003 Procurement and Suspension and Debarment

Federal Catalog Number/ 97.056 Port Security Grant Program Program Name:

Audit Finding: The City received funding under the Port Security Grant program under separate awards from various granting agencies. The Port of San Francisco received a direct award from the U.S. Department of Homeland Security for this program. During our audit, we selected 1 of 2 contracts for testing with procurement requirements. Our procedures identified that the contract files did not contain documentation to support whether the Port verified that the contractor was not suspended nor debarred before contract execution. The Port had updated its internal procedures in August 2016 to include retention of documentation on the suspension or debarment verification to support compliance with the requirement. It should ensure the updated procedures are communicated to all applicable personnel and periodically monitored for compliance.

Corrective Action: The Port updated its internal procedures in August 2016. In connection with this update, all grant project managers and supporting procurement and accounting staff have been reminded to retain documentation on the suspension or debarment verification necessary to support compliance with this requirement. Accounting staff has also been assigned to periodically monitor compliance. For professional services contracts and general procurement, staff checks the EPLS to verify that prospective contractors are not suspended, or otherwise excluded from participation. Upon confirmation, staff is to retain a dated screenshot from EPLS in the department file. For construction services, staff collects a certification from prospective contractors. The Port submitted this August 2016 update of its internal procedures to the U.S. Department of Homeland Security’s Federal Emergency Management Agency (FEMA) as the corrective action for the non-compliance cited during FEMA’s July 2016 onsite review. The Port received a determination letter from FEMA dated September 23, 2016 that the non-compliance related to verification of debarment and suspension prior to issuance of grant funds has been resolved and is closed.

Status of Corrective Corrective action was implemented. Action:

192 CITY AND COUNTY OF SAN FRANCISCO STATUS OF PRIOR YEAR’S FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2016

Reference Number: 2015-004 Activities Allowed or Unallowed; Allowable Costs/Cost Principles

Federal Catalog Number/ 93.658 Foster Care - Title IV-E Program Name:

Audit Finding: The City’s Foster Care program was administered by the Juvenile Probation Department and the Human Services Agency, which performed quarterly time studies to allocate program costs to various federal programs. Based on our review of the time studies prepared by the Juvenile Probation Department, we noted that several instances in which sick leave and vacation hours were not properly reflected in the proper time study categories. Costs were not properly allocated to the proper Foster Care program functions, which have varying reimbursement rates. We recommend Juvenile Probation Department review and implement procedures to ensure that all employees and supervisors properly adhere to time study instructions and reflect hours in the proper time study categories.

Corrective Action: The Juvenile Probation Department has met with its Probation Supervisors to communicate the requirements in documentation of allocable activities on time study documents. Protocols have been implemented to review the allocation of activities to cost objectives. Additionally, a review process is being developed with expectations that these activities and entries be reconciled against the payroll timesheets.

Status of Corrective Corrective action was implemented. Action:

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